Report No. 23341 -IND Indonesia Development Policy Review The Imperative for Reform December 10, 2001 Poverty Reduction and Economic Management Unit East Asia and Pacific Region Document of the World Bank CURRENCY EQUIVALENTS (As of November 2, 2001) Currency Unit = Rupiah (Rp.) US$1 = Rupiah 10,600 FISCAL YEAR: April 1-March 31 till 2000 FY 2000 is 9 months, April 1 to December 31 Same as calendar year from 2001 onwards ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank JITF Jakarta Initiative Task Force ADF Asian Development Fund JSX Jakarta Stock Exchange AFTA ASEAN Free Trade Area KDP Kecamatan Development Program BAPEPAM Capital Market Supervisory Board K-GRIP Kabupaten Governance Reform BCA Bank Central Asia Initiatives Project BI Bank Indonesia KPPU Comnuission for Business Competition BII Bank Internasional Indonesia KTP National Identity Card BIS Bank for International Settlements Kwh Kilowatt hour BPN National Land Agency LAN State Administration Board BNI Bank Negara Indonesia Lol Letter of Intent BKKBN National Family Planning Coordinating MenPAN State Ministry for Administrative Board Reforms BKN Civil Service Agency MIGA Multilateral Investment Guarantee BKPK Coordinating Agency for Poverty Reduction Association BLBI Bank Indonesia Liquidity Support MOF Ministry of Finance BoP Balance of Payments MOHA Ministry of Home Affairs BPK Supreme Audit Board MoU Memorandum of Understanding BPKP Financial & Development Supervisory MPR People's Consultative Assembly Board NBFI Non-Bank Financial Institution BPN National Land Agency NCCG National Committee on Corporate BPR Bank Perkreditan Rakyat Governance BRI Bank Rakyat Indonesia NCCT Non-Cooperative Countries and BTN Bank Tabungan Nasional Territories BULOG State Logistics Agency NFP National Forest Program CBS Central Bureau of Statistics NGO Non Government Organization CEIC CEIC Data Company Ltd. NPPO National Public Procurement Office CGI Consultative Group on Indonesia NTB West Nusa Tenggara CITES Convention on International Trade in OC Oversight Committee Endangered Species OECD Organization for Economic Co- CPI Consumer Price Index operation and Development DAK Special Allocation Fund OPIC Overseas Private Investment DAU General Allocation Fund Corporation DIP Authonzation to spend OPK Special Market Operation DPR House of Representatives Perda Regional Regulation FATF Financial Action Task Force Persero State-owned limited liability company FDI Foreign Direct Investment PLN State Electricity Company FITRA Indonesian Forum for Budgetary PP Government Regulation Transparency PROPENAS National Development Program FSPC Financial Sector Policy Committee ROSC Review of Standards and Codes GBHN State Policy Guidelines SGP Scholarships and Grants Program GDP Gross Domestic Product SMEs Small and Medium Enterprises Gol Government of Indonesia SMERU Social Monitoring and Early Response GTZ German Technical Corporation Unit IBRA Indonesian Bank Restructuring Agency SOE State-Owned Enterprises IDA International Development Association SSNAL Social Safety Net Adjustment Loan IDCF Interdepartmental Committee on Forestry SUSENAS National Socio-Economic Survey IFC International Finance Corporation UN United Nations IMF International Monetary Fund UNSFIR United Nations Support Facility for IPO Initial Public Offering Indonesian Recovery IPP Independent Power Producer WTO World Trade Organization Regional Vice President Jemal-ud-din Kassum Country Director Mark Baird Chief Economist Homi Kharas Sector Director Homi Kharas Task Team Leader Vikram Nehru TABLE OF CONTENTS Page No. EXECUTIVE SUMMARY ..................................................i 1. MACROECONOMIC PERFORMANCE AND OUTLOOK ..................................................1 Stability and Market Sentiment ..................................................1 The Real Economy ..................................................5 Income, Wages, and Poverty ...................................................6 International Trade and Payments ..................................................7 Fiscal Policy ..................................................9 External Financing Needs ................................................. 13 The Macroeconomic Outlook ................................................. 15 Risks ................................................. 17 Fiscal Sustainability and Debt Management ................................................. 18 Conclusion ................................................. 23 2. STRUCTURAL REFORMS FOR GROWTH ................................................. 24 Moving Public Assets to the Private Sector ................................................. 24 Corporate Restructuring ................................................. 27 Reforming the Financial Sector ................................................. 32 Improving Agricultural Policy ................................................. 37 Reshaping Energy Policy .................................................. 41 Revitalizing Mining ................................................. 43 Promoting a Responsive Yet Responsible Private Sector ................................................. 44 Conclusion ................................................. 46 3. IMPROVING GOVERNANCE AND ANTI-CORRUPTION ............................................... 47 Corruption ................................................. 49 Reducing Opportunities for Corruption ................................................. 50 Public Financial Management and Procurement Systems ................................................. 51 The Legal Framework ................................................. 53 Legal and Justice Sector Reforms ................................................. 53 Decentralization ................................................. 59 Civil Service Reforms ................................................. 64 Governance and Decentralization - The Case of Forestry ................................................. 65 Conclusion .................................................. 67 4. TOWARD A STRATEGY FOR POVERTY REDUCTION ................................................. 68 Poverty Trends ................................................. 68 Government Policies and the Poor .................................................. 71 Investing in the Poor ................................................. 73 Reducing Poverty in a Decentralized Environment ................................................. 76 Empowering the Poor .................................................. 78 Mainstreaming Poverty Reduction ................................................. 81 Conclusion ................................................. 82 STATISTICAL ANNEX ................................................. 83 A CKNOWLEDGEMENTS This report was written by a team led by Vikram Nehru, and comprising Bert Hofinan, Sarwar Lateef, Yoichiro Ishihara, Magda Adriani, and Mona Haddad. Contributors were Vivi Alatas, Amitava Banerjee, Bernard Drum, Michael Edwards, David Hawes, Kai Kaiser, Dara Lengkong, Jeffrey Lewis, William Mako, Stephen Mink, Menno Pradhan, Megawati Sulistyo, Anthony Toft and Tom Walton. Peer reviewers were Anggito Abimanyu, Amarendra Bhattacharya, Milan Brahmbhatt and William Wallace. Helpful comments were received from Surendra Agarwal, Sandy Lieberman, Jessica Poppele, Zia Qureshi and Mariam Sherman. Staff support was provided by Nina Herawati, Lieke Sastrosatomo, Christina Setiadi and Muriel Greaves. Overall guidance was provided by Mark Baird and Homi Kharas. The report was discussed with government officials on November 1, 2001. EXECUTIVE SUMMARY 1. Indonesia's recovery was already slowing several months before the events of September 11. Political instability had raised social tensions and slowed reforms - fueling capital flight, alarming investors, and delaying official external finance for development. Progress on bank restructuring had slowed and the debt of financially strapped corporates remained largely unresolved. Corruption flourished, unchecked by a justice system that itself was corroded. Regional tensions increased even as the country embarked upon an ambitious decentralization program. And, if real wages are any indication, progress on poverty reduction - encouraging in 1999 and early 2000 - ground to a halt. 2. Markets welcomed the appointment of President Megawati Soekarnoputri in July 2001 with a substantial appreciation of the rupiah. The new government quickly reached agreement with the IMF on a long-delayed Letter of Intent, and Parliament approved the budget for 2002, autonomy laws for Aceh and Papua, and a new Oil and Gas Law. 3. But in the one hundred days since assuming office, the new administration has made little progress on structural and governance reforms - renewing nervousness in markets and worrying external donors and creditors. The events of September 11 and the slowdown in the global economy worsened the investment climate in Indonesia, adding to the government's already formidable array of challenges. 4. Economic outlook. Indonesia's economy is set for slower growth in 2001 and 2002 (3.3 percent and 3.5 percent respectively, compared to 4.8 percent in 2000). Although seemingly robust in comparison to other crisis countries in East Asia, this growth rate is still too low - because Indonesia's recovery has lagged behind its neighbors and over half of its population is vulnerable to poverty, more than any other crisis country. Moreover, Indonesia's fragile banking and corporate sectors, and the precarious state of its government finances, make the country highly vulnerable to risks - with immediate implications for fiscal sustainability. 5. Fiscal sustainability and external financing needs. The most immediate priority, then, is to ensure fiscal sustainability - for stability and as a foundation for growth. Implementation of a sound budget for 2002 is a step toward this objective. The budget involves sizable revenue mobilization, reduction in fuel subsidies, and asset sales (including - hopefully more successfully than before - privatization). Gross external financing to meet the budget deficit is estimated to be about US$7 billion. Of this, the CGI disbursement pledge being requested is US$3.0-3.5 billion. 6. In previous years, actual disbursements have fallen short of CGI pledges - particularly for program loans. Indeed, over the past four years, the shortfall adds up to US$9 billion. Official creditors are becoming increasingly wary of pledging in support of policy reforms when the track record gives little cause for comfort. As in previous years, disbursements from ongoing and new program loans pledged in the CGI will be conditional on policy performance, so their disbursement should not be a foregone conclusion. ii 7. Reform priorities. The events of September 11 have not altered Indonesia's reform priorities - on the contrary, they have emphatically underscored their urgency. But donors need to be realistic about what is feasible, given strong vested interests, severe institutional weaknesses, the uncertainties arising from decentralization, and a turbulent transition to democracy. Progress is most needed in the key areas of structural reforms, good governance, and empowering and investing in the poor. Together with fiscal sustainability, they are consistent with the premise that stability, growth, and effective government are the key ingredients for long-lasting and sustainable poverty reduction. 8. Poverty is the development challenge facing Indonesia today. The agenda in this report and for the CGI is about keeping faith with the millions of poor people in Indonesia seeking a better future for themselves and for their children. It is important that every effort is made to complete this agenda successfully - and that all stakeholders, including the international community, work jointly for this common purpose. iii Summary of Key Recommendations This report contains many policy recommendations for Government and the creditor community. Clearly, they cannot all be implemented at once. Here we list key recommendations and put them in the sequence in which we think they should be implemented - the important and urgent belong at the top of the list. Actions needing completion this year (2001) o Maintain a tight money policy through the rest of the year to bring down inflation. o Privatize BCA, Bank Niaga, and Semen Gresik as planned. o Enact an effective Anti Money Laundering Law that strengthens the legal framework for anti- corruption. o Finalize an action plan to create the right organizational structure and legal framework for Indonesia's public procurement system. o Adopt a rice policy which balances the needs of farmers and consumers (especially the poor), and which gives BULOG a medium-term, fiscally-sustainable role. Actions for completion next year (2002) For stability: o Meet privatization and IBRA asset recovery targets in the 2002 budget. o Implement reforms that ensure disbursements of pledged program financing from official creditors. For structural reforms: o In consultation with Parliament, prepare a medium-term financial sector reform strategy. o Close or merge banks that fail to meet the central bank's year-end capital adequacy requirements. o In consultation with Parliament, prepare a divestment strategy for state banks. o Consolidate and restructure the Java-based, state-owned, sugar industry. o Complete restructuring of PLN. For good governance: o Establish a credible, independent, anti-corruption commnission and fund it adequately. o In consultation with Parliament prepare a comprehensive strategy to reform the justice sector and the civil service. o Enact improved versions of the state finances, state treasury, and state audit laws in cooperation with Parliament. o Establish the organizations to oversee Indonesia's public procurement system. o Adjust the legal and regulatory framework for government procurement to meet WTO and AFTA commitments. For empowering and investing in the poor: o Prepare and present to Parliament a comprehensive poverty reduction strategy based on consultations with key stakeholders. o Ensure general allocation grants are more equalizing across regions. o Allocate budgetary resources specifically for poverty alleviation programs in the regions. 1. MACROECONOMIC PERFORMANCE AND OUTLOOK 1.1 The sharp deterioration in the global economy following the'terrorist attacks in the United States has added another challenge to the already daunting list faced by the new Megawati administration. The new government had inherited a fragile economy, amid faltering world trade and global demand. Indonesia's growth slowed and inflation climbed following months of heightened social tensions and political uncertainty preceding the special session of the Peoples' Consultative Assembly (MPR) in July 2001. In the end, presidential power was transferred smoothly and peacefully and financial markets heaved a sigh of relief, greeting the event with a sharp appreciation in the rupiah. The new President earned general acclaim for her cabinet appointments and her new economic team rapidly came to agreement with the IMEF on a much-delayed letter of intent (Box 1.1). But the honeymoon was short lived. Within weeks, the exchange rate started deteriorating once again and inflation refused to be subdued. Moreover, in its first 100 days in office, the new Government seems to have made little progress on its immediate policy priorities, which include: maintaining macroeconomic stability, accelerating bank and corporate restructuring, regaining fiscal sustainability, and ensuring continued service delivery to the poor while rapidly decentralizing government. As a result, official program loans supporting policy reforms are likely to disburse only about US$0.9 billion this year out of a total of US$2.6 billion pledged - adding to concerns about the sustainability of government finances. Stability and market sentiment 1.2 Monetary and exchange rate developments. In early 2000, the monetary and exchange rate situation was poised to become more supportive of economic recovery. The rupiah had strengthened from over Rp 16,000 per dollar at the peak of the crisis to around Rp 7,000. Inflation had been brought firmly under control, and interest rates had fallen to around 12 percent from a peak of nearly 70 percent. Real interest rates were still relatively high, but it was expected that they would begin to decline as reforms were implemented and risk premia began to narrow. 1.3 Instead, the environment for monetary policy deteriorated. Early slippages in reforms and an increasingly uncertain political climate raised risk premia and contributed to renewed downward pressure on the rupiah, which fell to about Rp 9,000 per dollar in the run up to the August 2000 MPR session. Partly as a result, inflationary pressures re- emerged in the second half of the year. Bank Indonesia was somewhat slow to respond to the emerging inflation threat, reflecting concerns about the effect of higher interest rates on economic growth, the banking system, and the budget. 1.4 These pressures continued into late 2000 and early 2001. After a brief respite, the rupiah came under sustained downward pressure, reaching Rp 12,000 per dollar in April 2001 on growing concerns about the overall direction of economic policy and emerging political instability. Bank Indonesia continued to raise interest rates during this period, but its ability to respond more forcefully was constrained by pressures to change the central 2 Box 1.1 Selected Government Commitments in the Letter of Intent of August 27, 2001 Macroeconomic Framework and Policies * Maintain a growth target in 2001 of 3-3.5 percent, inflation 9-11 percent. * Reduce base money growth to 12 percent by March 2002. * Review implementation of 2001 budget and framework for 2002 budget in mid-October. * Draft 2002 budget to include a deficit of 2-3 percent of GDP. * Submit to Parliament the draft Sovereign Debt Securities Law. Fiscal Decentralization * Transfer to the regions a total of 2.1 million civil servants by end-2002. * Calculate revenue sharing and General Allocation Fund transfers based on original budget estimate. * Use contingency funds only up to the Rp. 3 trillion allocated in the revised budget. * Finalize modalities to issue bonds in last quarter 2001 to resource surplus regions. * Complete audits of the allocation of the contingency funds by end 2001. . Refine the formula for the General Allocation Fund for use in 2002. Banking System Reforms . Launch Bank Mandiri IPO (up to 30 percent of shares) by end-2001. * Publish key financial data for individual banks by end-2001. * Adopt action plan to improve supervision, regulations, and governance of NBFIs. * Complete by end-2001 all outstanding issues from BI's 1999-2000 audit. * Resolve BLBI credits issue between BI, GOI, and Parliament by end-2001. * Finalize replenishment of Government Guarantee Scheme by first week of September. * Remove BII' s impaired assets and replace with government bonds by mid-September. IBRA Asset Recovery and Restructuring * Respond to the OC review of first four large restructurings by mid-September. * Publish next round of ten OC reviews by mid-October. * Launch sale of unrestructured loans by end-2001 using competitive bidding mechanisms. * Discuss with Parliament sale of 51 percent of BCA to a strategic partner. * Sell majority stake in Bank Niaga by end-2001. Corporate Restructuring and Legal Reforms * Restructure a cumulative total of $14-15 billion by end-2001. * Refer from FSPC by end-December 2001 cases with a total debt of $ 10-11 billion. * Submit an amended version of the Bankruptcy Law to Parliament by end-2001. * The Anti-Corruption Commission to become fully effective in coming months. Public Sector and Other Structural Reforms * BPKP audit of the Reforestation Fund will be completed by end-2001. * Publish audits and announce corrective actions of key SOEs by end-September. * Publish audit of the tax office by end-September and announce corrective actions by mid-October. 3 bank law and remove its senior management. Bank Indonesia's accommodative monetary stance in this period meant that base money growth accelerated sharply in the second half of 2000. Not surprisingly, interest rates climbed in nominal terms, but failed to keep pace with higher inflation; as a result, real interest rates fell at a time when risk premia for Indonesia were generally on the rise. 1.5 Since mid-2001, monetary conditions have been tightened significantly. This partly reflects further moves by Bank Indonesia to raise its key policy intervention rate in July. In addition, the improvement in market sentiment following the change of government contributed to a marked recovery in the rupiah, which reached an eleven-month high of about Rp 8,500 per dollar in mid-August. The stronger rupiah raised expectations for lower interest rates, as inflationary pressures abated and base money was brought back under control. Since then, however, the rupiah has come under renewed downward pressure, and inflation has yet to show signs of abating (Figure 1.1). These developments have reduced the scope for lowering interest rates in the short term. 1.6 Market sentiment. Domestic politics and global economic developments were not the only factors playing on the minds of investors and markets. Two other factors were at play in keeping markets jittery. First was the handling of legal disputes in the corporate sector and growing concerns about acquiring assets in Indonesia. Prime examples were: (a) the Manulife case, where a dispute over one small insurance policy with the insurance group led the claimants to initiate bankruptcy proceedings against the company and its foreign owners (Manulife and IFC); (b) the case of PT Panca in which unsubstantiated third party creditors voted against the company's bankruptcy as proposed by the original creditors (see Chapter 2); (c) PLN's dispute with IPPs where resolution is a pre-requisite for renewed large scale private infrastructure investment (see Chapter 2); and (d) Govemment's difficulties with privatizing BCA, Bank Niaga, and Semen Gresik - which add to the impression that acquiring assets from the Indonesian Govemment is difficult and risky. In all these cases, there is a clear perception that actions by the authorities reflect a systematic bias against foreign investors and an unequal application of the law in favor of domestic debtors. 1.7 Second was the Indonesian reaction to the U.S.-led strike against Taliban forces in Afghanistan. Television images of Indonesian demonstrations flashed around the world, alarming potential investors abroad and even stirring disquiet among residents. This further damaged Indonesia's reputation as a preferred location for foreign investors. 4 Figure 1.1 A macroeconomic snapshot, January 2000-October 2001 The rupiah bounced back briefly ... ... a movement mirrored by the stock market. (rupiah per US$, spot rate daily) (Jakarta stock exchange composite index and one month Bank Indonesia certificate rate) 7,000 7,000 JSX Index SBI rate I%) 20 690- el's certificate 8,000 8 000 650 - (1 month rate) 610 - 9,000 9,000 570 16 530- 10,000 - 1 0,000J 490 14 450 -1 2 11,000 - 11,000 410- 370 -JSX composit 12,000 - 12,000 Indices 330 R Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 Oct-01 Jan-00 Apr-00 Oct-99 Jan-00 May-00 Aug-00 Nov-00 Mar-01 Jun-01 Sep-01 Source: Bank Indonesia Source: CEIC Inflation rose .... ... and interest rates caught up, but with delay. (12 month percentage change in consumer & food (One month rupiah deposit rate in Indonesia) price index) 14 CPI General 13 -13-F 10 - 13- < f : 12 _.. Domestic Banks 4Ya nya -n quarerl Prw h,cn ercn) (D,cnupinadivsmn ne,19Q 10 10 n -20 09 - -5 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ t9 ------ 200r20- Foreign Banks Jan-DO May-00 Sep-00 Jan-01 May-01 Sep-01 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 Oct-01 GDP growth remained positive.... ..die ydmsi e ad (Year on year and quarterly growth, in percent) (GDP, consumption and investment index, 1998Q1 =I00) 10 ~~~~~~~~~~~~~~~120 Private Consumption -. ~~~~~~~Quarterly growth 9 -10 ~~~~~~~~~~~~~~~80 Year-on-year growth -151 701 -20 01Q2 Q30Q4 Q1Q2 Q304 Ql 2 Q3 Q4 Ql02 Q3 4 Ql 2 1997 1998 1999 2000 2001 C1 2 030C401l 02 030Q401 02 030401l02 1998 1999 2000* 201~ Source: CBS Source: CBS 5 The real economy 1.8 Recovery in the real economy also remains fragile. Despite the fact that the second quarter GDP results were better than expected, results for the first half reveal a marked slowdown-3.4 percent growth in GDP compared to 4.7 percent in the first semester of 2000 (Table 1.1).1 Growth in government consumption eased because of fiscal strains, but private consumption growth held up well, despite a sharp decrease in consumer confidence arnid political turmoil. And net exports declined substantially in the wake of the global slowdown (see below). But the big surprise was fixed capital formation which, defying pervasive evidence of investor pessimism, climbed significantly in the first half of 2001, maintaining a trend that began in early 2000. Part of this could be statistical artifact, owing to the choice of investment deflator. But it could also indicate increased maintenance and rehabilitation of capital stock as growing manufacturing and rising capacity utilization have exacted a toll on existing plant and machinery. In small and medium enterprises and export industries, it may reflect genuine investment in new capacity as firms responded to high profitability in the wake of depreciation in the currency. And it may arise from increased Table 1.1 GDP growth slowed in 2001 (Growth in percent compared to same semester the previous year) 2000 2001 Sem. 1 Sem. 2 Sern 1 GDP growth 4.7 4.8 3.4 Non-oil GDP 5.1 5.4 3.9 By expenditure category Consumption 2.8 5.0 5.4 Household 2.9 4.3 5.3 Government 1.6 11.9 5.8 Fixed capital formation 16.8 18.9 17.7 Exports 18.1 14.1 14.4 Imports 4.4 32.0 34.4 By sector of origin Tradable Agriculture -2.5 6.3 1.5 Mining & quarrying 1.8 2.8 1.7 Manufacturing 7.7 4.8 4.2 Non-t radables Construction 10.6 3.1 0.5 Finance 5.5 3.9 2.7 Transport 10.6 8.3 6.7 Utilities 9.8 7.8 8.6 Retail trade etc. 6.0 5.4 5.5 Other 2.3 2.2 1.8 Source: CBS GDP growth for the semester is measured over the same semester the previous year. 6 residential construction (which could also explain the growth in cement sales). Despite this, however, investment continues to be below pre-crisis levels. 1.9 Slower GDP growth in 2001 has been the result of a slowdown in virtually all sectors of the economy - but this was particularly pronounced in some of the non-tradable subsectors, including construction, transport, and finance. Puzzlingly, other non-tradable subsectors, such as utilities and retail and wholesale trade, continued to perform relatively well, showing few signs of being affected by the rest of the economy. The erosion of real electricity tariffs since the onset of the crisis, and the shift to more energy-intensive tradable sectors is likely to explain part of the growth in the power sector. Income, wages, and poverty 1.10 The recovery has been good for the poor. Preliminary estimates from SUSENAS 2000 show that poverty declined substantially from its peaks in 1999. The headcount poverty index fell from over 27 percent in 1999 to 15 percent in February 2000, close to pre-crisis levels (see Chapter 4) 2 Other measures of poverty, using international standard poverty lines, lead to the same conclusion. The largest contributors to this decline were rising wages and a decline in food prices, notably rice. Unfortunately, since February 2000, the rupiah's depreciation was accompanied by rising food prices, while wages for unskilled labor in agriculture barely kept up (Figure 1.2). This would suggest that the poverty rate has probably budged little since February 2000, and may even have increased marginally.4 Of course, reality is much more variegated than such an aggregate analysis would indicate. For example, in some sub-sectors, notably hotels, real wages have declined by over 10 percent since early 2000, while in others they have increased. Also, trends in real wages have differed from region to region: while regions such as North and Central Sulawesi Figure 1.2 Rural real wages did not do well in the second half of 2000 110 Wages for seeding paddy fields deflated 100 CPI 90 so - , Wages in manufacturing deflated by CPI 70 - - 600L Dec-97 n-98 Der-98 Jun-99 Dec-99 3un-00 Dec-0O Source: CBS 2 Currently, only a range estimate can be given, as data are still being cleaned up. Moreover, different methodologies give different outcomes: SMERU's preliminary estimate suggests a point estimate of 18 percent, whereas our own preliminary calculations suggest 15.24 percent-lower than the 1996 headcount. 3 Indeed, in early 2000, agricultural real wages in Java were only 80 percent of their levels of January 1996. 7 show an improvement in real wages (and hence a likely reduction in poverty rates) since 1997, other areas such as Jambi continue to suffer poverty rates that are still more than double their pre-crisis level. International trade and payments 1.11 The combination of a global slowdown and weak domestic demand - together with the downward pressure on the rupiah throughout 2000 and the first half of 2001 - sharply lowered non-oil exports and imports and increased the monthly trade surplus from April 2001 onward. 1.12 Year-on-year export growth has been negative now for six months in a row, mirroring the performance of other countries in the region (Figure 1.3). Non-oil exports for September 2001 were 24.2 percentage points below September 2000. Electrical products destined for the United States and Japan have been hardest hit. Yet, Indonesia's exports have fared better than those of most countries in the region as only 10 percent of Indonesia's exports depends on the steeply declining data processing and telecommunications sector, compared to 30 percent in the region as a whole.5 In addition, a shutdown in Aceh's gas production triggered by regional unrest affected gas exports, and declining world oil prices dampened oil export revenues. 1.13 The deceleration in domestic demand and weaker exports meant that imports also declined for the first time in July 2001, followed by a sharp 25.4 percent year-on-year contraction in August followed by an equally worrying 27.9 percent fall in September (Figure 1.3). The slowdown was marked, as one would expect, in imports of intermediate goods (notably in chemical products), while consumer goods imports have remained reasonably steady. Because of the market slowdown in imports in 2001, the current account of the balance of payments is likely to remain in surplus at US$4.8 billion. However, at 3.2 percent of GDP, this is much lower than the 4.8 percent of GDP surplus in 2000. 1.14 External payments and international reserves. The capital account showed continued large imbalances between private and official capital. Despite large amounts of exceptional financing (a euphemism for arrears and rescheduling), private capital flows continue to be a drain on the balance of payments. Thanks to official flows, a major drop in reserves - or further depreciation of the rupiah - was prevented. Capital market inflows into Indonesia,6 which are particularly sensitive to market sentiment, slowed to a trickle; in the rest of East Asia, they are rebounding smartly from their crisis lows (Table 1.2). Foreign direct investment into Indonesia continued to be dismal as well, although better than the $5.3 billion outflows that official statistics forecast for this year.7 4 This is consistent with our projections in Chapter 4. SSource: TradeCan2000. 6 Bank loans, equity, and bonds. 7 Indonesia's BOP statistics divert from international practice in that FDI flows include debt transactions with non-parent companies and banks. As a result, FDI outflows are overestimated. 8 Figure 1.3 A slowdown in international trade Sluggish non-oil exports..... .... and plummeting imports $ niuo Growth rate $ Growth rate (percent) $ mi(ion (percent) 8,000 - 60 5,500 80 7,000 - 40 Year-on.year 60 Ytagrowth ra 4,500 growth rates 40 6,000 Gro wth rates 20 40 4,000-2 5,000 to0 3,500$ 0 4,000 n-o e .20 3Table01. NNo-o eeports -20 Indoes 3,000 .40~~~~~~~~~- -40 o~~~9 19 2,000 20 2,000 -6 ,0 60 Jan- Apr- Jut- Oct- Jan- Apt- Jul- Oct' Jan- Apr- Jut- Sep- Jan- Apr- Jut- Oct- Jan- Apr- Jut- Oct- Jan- Apr- Jul- Sep- 99.9.9900 00 00 0001 01 0101 99 999"99900 0000 0001 0101 01 Note: Growth rates are based on the level of exports (or imports) in the same mnonth the previous year. Source: CBS. 1.15 The official capital account continues to be in significant sur-plus, thanks in large part to the Paris Club arrangement. Repayments of loans extended during the crisis are on the rise, however, and official foreign exchange reserves drifted down from $29.4 billion in end-2000 to $29.0 billion in end-September, 2001. Table 1.2 No rebound for Indonesia (Gross intemnational capital market inflows to East Asia, US$ billion) 1997 1999 2000 2001 Jan.-July annualized Indonesia 20.1 1.7 2.2 0.6 China 24.8 6.9 25.5 13.0 Korea 26.9 14,6 22.7 34.6 Malaysia 10.5 6.0 6.5 8.8 Philippines 6.6 7.2 6.4 4.2 Thailand 8.5 3.5 3.7 2.2 Source: World Bank staff estimates from Euromoney, Bondware and Loanware. Note: for Indonesia, BI sources show a higher level of inflows, but here internationally comparable data are shown. 9 Fiscal policy 1.16 Fiscal sustainability has become a crucial challenge for Indonesia. In this context, the outcome of the 2001 budget and the preparation of the 2002 budget are important first steps in consolidating the government's fiscal position, and providing a firm basis for further measures in succeeding years. 1.17 The 2001 budget. The fiscal outlook for 2001 continues to be difficult. By mid- year, the combination of higher interest rates and a weaker exchange rate had raised the projected deficit from 3.7 percent of GDP to 6.0 percent (Box 1.2). Parliament approved a package of measures in June to restore the projected deficit to 3.7 percent of GDP and included special measures to compensate the poor for increases in fuel prices (Box 1.3). Box 1.2 New structural underpinnings affecting budget dynamics In earlier years, a depreciating currency and higher oil prices had a positive effect on the budget - and higher domestic interest rates had little effect. Not in 2001. Fiscal decentralization and the newly acquired burden of variable interest rate domestic debt changed the structural underpinnings to the budget. . A depreciation in the currency of Rp. 1,000 per dollar enlarged the deficit by 0.6 percentage points of GDP. * Similarly, a 10 percent increase in the oil price increased the central government deficit by 0.2 percent of GDP. The key reason is that increased revenues from depreciation and higher oil prices is shared with the regions, while higher spending on interest and fuel subsidies is not. * In addition, a 100 basis points rise in interest rates swelled the deficit by 0.15 percent of GDP, not to mention adding contingent liabilities to the government's balance sheet if it also contributes to higher recapitalization needs in banks. Unfortunately for Indonesia, movement in all three variables during 2001 were in the direction of worsening the budget. This year, the government mitigated the damage to some extent by fixing transfers to the regions at levels stated in the original budget. Next year, the Government plans to further reduce fuel subsidies. This will re-introduce a hedge in the budget against exchange rate movements. A more powerful approach would be an automatic fuel price adjustment mechanism, while a structural solution would lie in adjusting the regulations that guide revenue sharing arrangements with regional governments. 10 Box 1.3 Compensating the poor for fuel price increases The 2001 budget revisions approved by Parliament in June included some Rp. 2.2 trillion in schemes to offset the impact of the fuel and electricity price increases on the poor. In all, seven schemes were designed. These were: the expansion of the OPK subsidized rice scheme by 1.215 million households; bus subsidy schemes to avoid increases in bus fares; various health initiatives; various education programs for the poor; a clean water scheme in 314 locations; a micro-capital scheme through 1,000 institutions; and a coastal community empowerment scheme. Although delayed, most programs are now up and running. The bus subsidy scheme, however, was cancelled, because most municipalities approved fare increases that outweighed the cost increases associated with the hike in fuel prices. To what extent the compensation schemes have actually benefited the poor is yet to be determined, and BPKP is set to audit the measures before the end of the year. 1.18 These revisions notwithstanding, the 2001 fiscal outlook remains worrying. The revenue and expenditure outcomes look likely to come close to budgeted levels, but a shortfall looms in available domestic and external financing for three reasons: - First, as we have already noted, IBRA cash sales could be below target. - Second, meeting the privatization target in these last two months of the fiscal year will be challenging, to say the least. - And third, program financing is expected to fall significantly short of budget because reforms supported by these loans have been delayed. The second tranche of the World Bank's Social Safety Net Adjustment Loan (SSNAL) was cancelled because key actions were not completed. Similarly, other program loans, most from the ADB (with some co-financing from Japan), remain undisbursed because of delays in policy implementation. 1.19 Unless there is a concerted effort by all branches of government and Parliament to meet these policy conditions, there is a strong likelihood that these loans will not disburse this year as scheduled. To balance the budget, the Government will need to implement a package of measures including: getting the privatization program up and running; accelerating IBRA asset sales; raising more resources, perhaps by increasing bond issues to reluctant regions; cutting unallocated development expenditures while protecting high priority spending on health, education, and basic infrastructure maintenance; and accumulating arrears on expenditures already committed. The last measure is very costly and should be avoided to the extent possible - as it will disrupt development projects and impose further financial strain on key state enterprises such as PLN and Pertamina. 1.20 So far, implementation of the 2001 development budget has been slower than normal. One reason was that Parliament almost doubled the domestically financed component (when it reviewed the draft budget in late 2000). As a result, project preparation fell behind schedule in 2001. Moreover, Parliament wanted to review individual projects in the development budget, and as a result authorizations to spend (DIPs) were not issued 11 before April. Indeed, some implementing agencies had to wait until September to obtain their DIPs. 1.21 An important concern is whether decentralization will lead to a decline in development expenditures. The concem stems from two factors - whether regions have enough resources and whether they will emphasize development to the same extent as the center. Revenues have increased significantly for local govemments, but so has recurrent spending as civil servants were transferred to their payroll. The resource revenue share benefited only some 15 to 20 local govemments (out of a total of 341), and the general allocation fund (DAU) did not compensate the remainder adequately. So many local govemments-and especially provincial governments-came under budgetary pressures. Table 1.3 Planned central and regional development spending 2000 and 2001 FY2000 FY2001 estimate budget (9 months) Regional development spending1 14.8 29.5 Total central development spending 40.7 45.5 Central government implemented 23.9 42.8 Regionally implemented from central 16.8 2.7 budget Total development spending 55.5 75 (as a share of GDP) 5.0 5.1 Source: MOF, regional budget documents. lFor 2000, estimated from budgets of 25 provinces and 310 districts and provinces. For 2001, regional spending was estimated by assuming that all regions spend the same share of their revenues on development as the 145 regions for which data are available. Despite this, planned development spending by the regions was expected to double in 2001 and push total development spending to 5 percent of GDP, about the same as planned in 2000 (Table 1.3). In actuality, central and regional development spending will fall short in 2001-the former because of financing constraints (see below) and the latter because of an unexpectedly large wage increase-which was only partly compensated for by a Rp.3 trillion disbursement from the contingency fund. 1.22 The 2002 budget. The Parliament approved the 2002 budget on October 25, 2001. To reflect the changed economic environment, the Govemment agreed with Parliament to change the underlying macroeconomic assumptions in early October. The final budget incorporates an overall deficit of 2.5 percent of GDP, balancing the need for adequate development expenditures while consolidating the govemment's debt position. The budget assumes a real GDP growth rate of 4 percent in 2002, an annual inflation rate of 9 percent, and an exchange rate of Rp. 9000 per dollar. Key features of the budget include: some increases in tax revenues based on improved tax administration and some changes in excise taxes; a very modest rise in civil service salaries; a further increase in fuel prices (and, thus, lower fuel subsidies); a new formula for allocating central grants to districts to make it 12 more equalizing;8 a central govemment development budget of 3.1 percent of GDP; and, finally, a challenging target for IBRA asset sales and privatization receipts. A significant part of the privatization and asset sales receipts are earmarked to repay expensive domestic debt. 1.23 The budget represents a considered approach to gradually bringing the deficit down while keeping the government's debt service burden to a mninimum (under the circumstances). This comes, however, at some cost: the central government's development budget, for example, remains at 3.1 percent of GDP despite having been cut three previous years in a row - the state of Indonesia's infrastructure and declining quality in social services bear testimony to this. Of course, local governments could compensate by increasing the size of their development budgets (now estimated to be about 2.0 percent of GDP), but there is no certainty this will actually happen, as the regions are free to spend their general grant as they see fit. Table 1.4 External financing needs and the CGI request US$ billions Budget deficit 4.7 Domestic finance 2.6 Privatization receipts 0.4 Asset recovery 2.2 Foreign finance 2.1 Net disbursements 2.1 Amortization 4.9 Total financing needed 7.0 Non-CGI financing a/ 3.7 CGI financing 3.3 TOTAL CGI FINANCING REQUESTED 3.0-3.5 a/ Includes export credits as well as financing from other sources, including Paris Club rescheduling. Source: World Bank staff estimates. 8However, at the time of writing, Parliament has asked the Govemment to "compensate" the rich regions for a projected DAU drop in 2002. The Rp.4 trillion that it would cost to keep these regions at the same level would not only strain the central budget, but would further undermine the equalizing properties of Indonesia's fiscal system to the detriment of the poor regions. 13 1.24 Maintaining the deficit at 2.5 percent of GDP requires a significant improvement in tax effort. Oil revenues-which are expected to amount to 6.8 percent of GDP in 2001, will drop to only 4.4 percent of GDP next year because of lower oil prices and a stronger rupiah. To counter this, the Government plans to increase non-oil tax revenues by 2.8 percentage point of GDP to 8.6 percent-a plan that will require significant administrative reforms and reduction in tax exemptions. External financing needs 1.25 The external financing needs of the budget follow from a broad strategic approach since the crisis of: * a steadily declining budget deficit as a share of GDP; * increasing the effort to raise domestic resources to finance the deficit; * seeking all possible means to lower the debt service burden including through more concessional external borrowing; and * rescheduling payment streams under existing international rules. 1.26 These directions are consistent with the broad objectives - or three pillars - of official financial support to Indonesia: assistance in support of macroeconomic stability; assistance in support of structural and governance reforms; and assistance for future development and poverty reduction needs. 1.27 The total budgetary financing needed in 2002 is expected to be about US$4.7 billion. Of this, about $2.6 billion will be financed by receipts from privatization and asset sales. Net disbursements of foreign finance will therefore need to be about US$2.1 billion. Add projected amortization, and the gross external financing need is US$7 billion. About US$3.7 billion is expected to be raised from a variety of sources - including export credits and rescheduling under the auspices of the Paris Club. That leaves about US$3.3 billion for CGI financing. Given the uncertainty that usually surround these numbers, the amount actually being requested from the CGI is in the range of US$3.0-3.5 billion (Table 1.4). This CGI request is substantially below the $4.5-5.0 range that was requested to help finance the 2001 budget, reflecting the smaller deficit this year and, hence, the need for less extemal financing. 1.28 In previous years, actual disbursements have fallen short of CGI pledges - especially from program loans (Box 1.4). Official creditors are becoming increasingly wary of lending in support of policy reforms when the track record gives little cause for comfort. As in previous years, disbursements from new program loans pledged in the CGI will be conditional on certain standards of policy performance by Government. While they will help toward meeting the budget deficit, they will be contingent and cannot be counted upon unless policy performance improves. 1.29 The uses to which the pledged amount is put are as important as the amount itself. For one, high fiduciary standards in Government will be important to ensure that these resources reach the project and program beneficiaries for whom they are intended. For 14 another, these resources need to be used for high priority projects which are judged on their outcomes, not just outputs, and which yield the highest economic and social retums. For this, projects need to fit within well-designed sector strategies that take account of the opinion of key stakeholders and recognize the appropriate role for Govemment in delivering public goods and services. And this also requires good coordination among the donor and creditor community, which has been progressing well in recent years, but which nevertheless has further room for improvement. Moreover, the Government needs to involve the beneficiaries not only in the design of projects but also in their monitoring and implementation (see Chapter 4 for more on this). 1.30 Another important feature of CGI meetings in recent years is the gap between the project finance pledged and the amount actually disbursed. Although actual disbursements appear to have held steady, there has been a steady decline in total project finance pledged (Table in Box 1.4). The number of projects in preparation appears to have atrophied gradually during the crisis, and large creditors, such as the World Bank and ADB, have Box 1.4 What a difference! Over the four year period 1998-2001, delays in policy implementation have cost Indonesia over US$6 billion in delayed or cancelled program financing - out of a total of about US$13 billion (box table). This does not include delays in project finance amounting to US$3.1 billion, and postponements in the IMF program which have cost the county a further US$1 billion in delayed tranche releases.9 Two conclusions can be drawn from this. First, slow and halting reforms have cost Indonesia dearly in terms of resource availability that could have boosted development spending for the poor. And second, contrary to opinion among some quarters (in Indonesia and abroad), official creditors have withheld finance when policy performance was slow or below par, correctly holding the Government to its commitments. Box Table Disbursements of program and project finance, pledged and actual (US$ billions) 1998/99 1999/00 2000 2001 Total proj. Program Pledged 4.7 3.2 2.7 2.6 13.2 Actual 4.0 1.9 0.2 0.9 7.0 Difference 0.7 1.3 2.5 1.7 6.2 Project Pledged 3.2 2.6 2.0 2.2 10.0 Actual 1.5 1.8 1.9 1.7 6.9 Difference 1.7 0.8 0.1 0.5 3.1 Source: World Bank staff estimates based on data from the Ministry of Finance and Bank of Indonesia. 9 The IMF recently completed its third review when its original schedule indicated it should have completed its eighth. 15 cancelled substantial amounts of undisbursed loans which no longer supported the priorities of an Indonesia in crisis. The result is a substantial decline in the stock of undisbursed project loans, and hence a decline in the level of disbursements. Yet, pledged disbursements have outstripped actual performance. Part of this could be due to unexpected delays in project implementation. But the fact that pledged and actual disbursements appear to be converging is a good sign that donors and creditors are taking a more realistic view of the pace of project implementation in Indonesia. The macroeconomic outlook 1.31 Indonesia's economy was already slowing before September 11, 2001. The global effects of the terrorist attack will accentuate Indonesia's slowdown, especially if the rest of the world slips into recession, and world trade decelerates markedly as it threatens to do. 1.32 The World Bank projects that world GDP growth will slow from over 4 percent in 2000 to around 1.3 percent in 2001, and only slightly more in 2002, before climbing to 3 percent by 2003. Hopes for recovery in Japan, Indonesia's largest trading partner, have faded and growth in the USA, the second largest trading partner, could turn negative by the end of the year. World trade - which grew over 11 percent in 2000 - is expected to remain almost stagnant this year, and grow some 4 percent in 2002. Tourism, a sector that contributes some 3.5 percent to Indonesia's GDP, has been hit particularly hard by the September 11 attack. 1.33 These global trends towards recession will undoubtedly have their impact on commodity prices-which, with the exception of oil, were already showing a downward path for several years. Oil prices briefly jumped after the attack, but the markets now have decided that the demand effects of a global slowdown will outweigh the supply effects of any possible disruption, and oil prices could dip below $20 for 2002. While overall international interest rates are expected to fall and remain low, Indonesia's risk premium in international capital markets is more than 500 basis points over US Treasuries - reflecting continued negative market sentiment. It is unlikely to decline swiftly, and could even jump if domestic tensions rise. 1.34 Given these global trends, Indonesia's growth is set to slow. Exports could hardly be expected to play the role they did last year. So it will need to be the domestic market that leads the way. Unfortunately, the Government's debt situation precludes it from using the budget to stimulate the economy. The answer will need to come from the private sector. 1.35 It is for this reason that the climate for private investment has become so crucial for Indonesia's economic recovery. And this climate will depend entirely on the level of security and law and order in the country and the pace of domestic reforms, including progress in bank and corporate restructuring, fiscal decentralization within a framework of overall fiscal consolidation, monetary stability, and governance. But these are complex and far-reaching reforms which require effective implementation and a sound legal environment - and so expectations of progress must be modest. The new government, in its Letter of Intent to the AIF, committed itself to a realistic and feasible reform program over the next 16 six months. Unfortunately, progress so far has been disappointing, and the markets have shown their displeasure (see above). 1.36 The Bank therefore places Indonesian squarely in the "muddle-through" scenario as described in its Country Assistance Strategy. In this scenario, Indonesia maintains a modicum of macroeconomic stability, but implements structural reforms in fits and starts, with some policy reversals. Private investment (domestic and foreign) revives barely enough to keep GDP growth at about 3.5 percent in 2002, and 4 percent beyond that (Table 1.5). In the absence of decisive policy action, the fiscal position remains marginally sustainable. The government debt-GDP ratio and the debt service to fiscal revenues ratio decline gradually, but not by enough to reduce the economy's vulnerability to future shocks (see below). Table 1.5 Indonesia's macroeconomic outlook under two scenarios Muddle-through Performance scenario scenario 2000 2001 2002 2003 2001 2002 2003 GDP Growth (percent) 4.8 3.3 3.5 4.0 3.3 4.0 5.0 Inflation (percent change in 11.3 10 8.5 5.0 10.0 7.5 5.0 GDP deflator) Current account balance 5.3 3.0 0.9 -0.5 3.2 0.7 -0.2 (percent of GDP) Total external debt (percent of 100.2 86.3 75.5 69.5 86.8 75.1 68.5 GDP) Source: World Bank staff estimates. 1.37 Surprisingly, even in this "muddle-through" scenario, Indonesia is expected to grow faster in 2002 than the average of the East Asian crisis economies (Table 1.6). This is partly explained by the relatively limited impact of the global hi-tech slowdown on Table 1.6 Indonesia's growth -- not bad in comparison (Real GDP growth; in percent) Projection 1998 1999 2000 2001 2002 East Asia 5 -6.7 6.8 6.9 2.3 3.4 Indonesia -13.2 0.8 4.8 3.3 3.5 Korea -6.7 10.9 8.8 2.4 3.4 Malaysia 7.4 6.1 8.3 0.9 3.7 Philippines -0.6 3.4 4.0 2.5 3.5 Thailand -10.8 4.2 4.3 1.6 3.0 Source: Authorities' data and staff estimates. 17 Indonesia, and to some extent by the expectation of further catch-up investment necessary to maintain current production levels. Moreover, Indonesia has recovered less sharply from the crisis than other countries, and therefore still has some way to go to regain its pre-crisis per capita income levels. 1.38 There is also the possibility that Indonesia's policy performance may pleasantly surprise. This "performance scenario" involves an effective government that stays on track with its reform program, helps improve investor confidence, and provides the security and law and order needed to raise investment rapidly to pre-crisis levels. This scenario could mean a higher GDP growth from 2002 onward. Higher investment demand would reduce the surplus on the current account more rapidly. But a combination of higher growth, lower interest rates (in light of lower inflation and reduced risk premiums), accelerated asset recovery, and a stable exchange rate will hasten the decline of the government debt to GDP ratio and the government debt service to fiscal revenue ratio. Risks 1.39 Before September 11, the principal risks facing the Indonesian economy were primarily domestic in origin - and these were enough to cause concern. But now, there is a significant overlay of global risks that on their own, and through their interaction with domestic forces, can significantly alter Indonesia's economic prospects. Domestically, halting and inadequate reforms, combined with political instability and regional tensions remain the largest risks. Internationally, the world slowdown could be even deeper and more prolonged than the current gloomy forecasts predict. And - despite being renowned as a moderate Muslim nation - Indonesia could find it difficult to balance domestic reactions to the aftermath of the September 11 attack and its international commitments as required, for example, by UN Security Council resolutions. All these risks could affect prospects for growth and poverty reduction, and weaken fiscal sustainability. 1.40 Domestic risks. As in the past, there may continue to be a significant gap between the promise - and the implementation - of reforms. For sure, there are some good reasons for this. Gone are the days when a few policymakers could make decisions behind closed doors. A democratic, decentralized Indonesia requires new decision-making procedures that imply a more complex and demanding environment for policymaking. But these procedures lend transparency and ownership to important economic decisions - which the international community supports wholeheartedly. 1.41 In short, Indonesia's political transition (as well as the international environment) require that decisions be made better. At the same time, however, Indonesia's difficult economic straits demand that decisions be made faster. There is an urgency attached to decisions on privatization, asset recovery, legal reforms, civil service reforms, and several key legislative initiatives. These have implications for sustaining the recovery and ensuring fiscal sustainability - arguably the most difficult macroeconomic challenges facing the country. 1.42 Domestic instability would add to this challenge by worsening negative investor sentiment, and - if not dealt with decisively - perhaps putting international financial 18 support at risk. Government has taken some measures to reduce regional unrest, including the recent passage of laws on special autonomy for Aceh and Papua. It has also started a process to return East Timorese refugees. And - albeit with some delay - it has dealt decisively with extremist groups that have threatened to attack foreigners residing and working in the country. But on all these fronts, there is always the risk that unrest and violence could once again arise and put to the test the Government's ability to maintain law and order and protect the security of people and property. 1.43 External risks. On the external front, further slowdown in the world economy could hit Indonesia through additional declines in export earnings and lower commodity prices. According to the World Bank, an extra 2 percentage point decline in investment in industrial countries costs East Asian countries on average some 1.5 percentage point of GDP in growth in the following year. Indonesia may not be hit as hard as the rest of East Asia on export volumes (simply because its trade to GDP ratio is lower than the regional average). But it will be hit harder on export prices, because further weakening is anticipated in already low oil and other commodities prices. If severe enough, the rupiah could show renewed volatility, interest rates would rise, and the recovery could slow further. Fiscal sustainability and debt management 1.44 The interaction between external and domestic risks makes for a potent cocktail - especially for Indonesia's fiscal sustainability and debt management. Further slowdowns in world growth and trade, delayed reforms in bank and enterprise restructuring, and jittery external financing - all work in the same direction; they threaten Indonesia's fragile fiscal situation, which stems in large part from an explosive increase in government debt. Starting from moderate debt before the crisis and a widely-acclaimed record of prudent debt management, the Government is now burdened with debt that exceeds 90 percent of GDP and debt service payments that siphon about 40 percent of fiscal revenues. 1.45 Most debt crises in emerging markets had their origins in rapid accumulation of government and government-guaranteed external debt. But in the case of Indonesia, while foreign borrowing increased in the early 1990s, the level of the government's external debt was only moderate in relation to GDP, and the reliance on multilateral and bilateral concessional sources provided extended maturities (averaging over 20 years) and concessional interest rates (averaging less than 5 percent) -- which acted as insulation against shocks. Instead, the sharp rise in Indonesia's indebtedness since 1998 derived largely from the fiscal response to the impact on the banking system and relates to the issuance of domestic debt (mostly bonds) to re-capitalize ailing or bankrupt banks and compensate Bank Indonesia for liquidity credits during the early months of the crisis. 1.46 Indonesia's high level of government debt and debt service is not just a product of the instability that Indonesia has experienced over the last four years - it is now a potential cause of economic instability as well. High debt service payments put considerable pressure on the Government's ability to maintain essential spending on development and poverty reduction programs. And concerns about the sustainability of government debt exert a strong influence on investor confidence, affecting both domestic interest rates and 19 Indonesia's ability to attract long term investment. High government indebtedness also renders the economy highly vulnerable to shocks, greatly limits the Government's ability to respond to new shocks, and leaves little margin for error in economic management. Most worrying of all, a high level of domestic debt tends to reduce the credibility of the government's resolve to keep inflation low and increases the incentive to "inflate" away the debt (as has happened in some Latin American countries). 1.47 Reducing government debt to more sustainable levels is a central focus of economic policy. Indeed, the Government of Indonesia's commitment to fiscal sustainability is prominently mentioned in its five year program (Propenas, November 2000) and annual plans (Repetas 2001 and 2002). These focus on the goal of reducing the government debt to GDP ratio to below 60% by 2004. The 2001 and 2002 budgets have been consistent with this objective. Achieving this outcome will depend on progress in three areas: * Restoring growth. Reducing debt in a low-growth setting is difficult. In a narrow sense, faster growth increases the denominator of the debt/GDP metric, reducing the debt burden. But more broadly, faster growth generates more resources for the budget and investment opportunities in the economy, facilitating adjustment and restructuring in the private sector and expanding the public sector resource base. * Maintaining fiscal discipline. The crisis and its aftermath have imposed severe strain on the budget: rising debt service costs have reduced resources available for development programs even as the need for development and poverty-targeted spending has increased. But it is essential that such pressures are contained, and that the budget generate a continuing fiscal surplus over the medium term. This in turn will require both improved revenue mobilization (from both tax and non-tax sources) and improved financial management and procurement (especially in local governments, where institutions and capacity remain weak). - Accelerating financial and corporate restructuring. The growth in domestic debt was matched by government acquisition of substantial assets (albeit of varying quality) mainly in the form of loans and equity. Expeditious disposition of these assets is key for two reasons: first, the receipts could be used to accelerate the reduction of domestic debt, and second, it would help galvanize the private sector and catalyze growth. 1.48 This essentially covers the entire macroeconomic agenda. We have already noted that progress on these fronts in the "muddle-through" scenario will be limited. But even so, the debt burden can gradually decline to moderate levels over the medium term (Figure 1.4). Specifically, the scenario assumes: * GDP growth recovering to 4 percent by 2003, maintained through 2010; * primary fiscal surplus of 3 percent from 2002 onwards - which basically means expending the same fiscal effort as is being proposed in 2002; * Inflation reduced from 10 percent in 2001 to 5 percent from 2003 onwards; * Constant real effective exchange rate from 2002 onwards; 20 * Reduction in domestic interest rates to 13 percent from 2003 onward; * IBRA asset recovery and plivatizations equal to around 6 percent of GDP cumulatively over the next 3 years; * No unanticipated large off-budget "surprises" or renewed crises requiring major additional debt creation by government. Figure 1.4 The sustainability of government debt under different scenarios (Using the trajectory of the ratio of government debt to GDP) In the muddle through scenario, deht-to-GDP ratios ... but much depends on growth and fiscal effort ... decline ... Extemnal debt Smaldler prriarryiiscal surplus and GDP groath halved Domestic debt I percent smialler primary 9:0.0 100 fsa upu 80.0 90 ~970.0 a,8 8 1~~~~~~~~~~~~~~~~~~70 60.0 IL 60 .50.0 50 40.0 40 tAxee through scenanfo 30.0~~~~~~~~~~~~~~~~~~~3 30.0 ~~ ~~~~~~~~~~~~~~~~~20 1 percert larger prrmary surpkei 20.0 10 and 1 percent faster GDP growth 10.0 0 0.0 5 8 2 8 8 8 r~, co 0) C, 0 N; Cq ) 'I 10 %o N~ n 0% ,-a, .00.- .N 0) 5 0 ) ) 0 0 0 0 0 0 0 a 0 - 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~r o ,0 C. 0 0 0C)0C a, a, a, S CO N 0) 05 N CS N Cl ~~~~~~~~~~~ ~~~~~~~CS N N N N C a. a. a. 5. >-~ ~~~ ~~~ ~~~~~~~~~ a, CD >- ..as well as the Gov'ernment's ability to contain contingent . .. but Indonesia would find it difficult to absorb the effects of liabilities and raise capital rev'enues (through asset sales)... another crisis. O~ff bidget esi1iuer hibor by Qisis scmnno I Peren orGDPamuinaly Mudxcile thog 120)-, scenaro.... .. 100 8 80 6D~~~~~~~~~~~~~~~~~~~0 ~~~~~~~40 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 4 Dl~~~~~~~~~~~~~~~~2 N 00 0% 00 CIm capi )CO N 00%reve% 0 0 Source: World Bank staff estimates 21 1.49 Under this scenario, the government debt to GDP ratio would decline steadily over the coming decade from the 2000 peak, with reductions in both the external and domestic components. By the end of the decade, debt ratios would be lower than at any time since the crisis began (although still twice as high as in 1996/97, the last pre-crisis year). But it should be emphasized that while such an outcome is feasible, it is by no means guaranteed: all the risks mentioned in the previous section could threaten such an outcome, and the high level of debt itself makes it less likely (see above). 1.50 Poor perfortnance in one or more of these areas would jeopardize the debt reduction outcome shown. Consider the effect of shortfalls in two key areas: a reduction in the primary surplus from 3 to 2 percent of GDP, and a halving of the GDP growth rate from 4 to 2 percent annually.I0 A lower primary fiscal surplus of one percentage point of GDP would lead to a debt/GDP ratio that is 10 percentage points higher in 2010 than in the original scenario; and halving GDP growth would raise it an additional 14 percentage points, with the result that the debt ratio falls much more modestly throughout the entire decade. Clearly, a combination of these two scenarios would lead to an unsustainable fiscal situation. Alternatively, if growth accelerates to 5 percent (rather than 4 percent in the base case) and the primary surplus can be maintained at 4 percent of GDP (rather than 3 percent), than the debt ratio would drop even more substantially, reaching around 35 percent by the end of the decade.'1 1.51 Similarly, consider a relaxation of the condition on "off-budget" contingent liabilities.12 If off-budget liabilities equivalent to 1 percent of GDP annually (around Rp. 16 trillion a year in 2002) require additional government borrowing, the pace of debt reduction would slow, and the debt/GDP ratio would reach 60 percent only in 2010. Alternatively, with higher capital revenues totaling 6 percent of GDP during 2002-2003 - perhaps from additional asset sales and privatization, the debt ratio at the end of the decade would drop to 42 percent (and the Government's target of a debt/GDP ratio of 60 percent is reached in 2006). As the rupiah revenues generated are used primarily to reduce domestic debt, the share of domestic debt in GDP would drop to only 18 percent, compared to 44 percent in 2001. 1.52 Finally, consider a crisis scenario, triggered, perhaps, by some combination of external events and domestic pressures (concerns over policy credibility, decline in investor confidence). In this scenario, we assume: (1) a precipitous drop in the exchange rate in 2002 (to 12,000 Rp/$); (2) a sharp rise in inflation (by 5 percentage points) in 2002, and a slow return to 5 percent; (3) an increase in interest rates on domestic debt (from 14 to 26 percent), with a slow return to existing levels; (4) no GDP growth for two years (2002-03), ° Changes in the government debt to GDP ratio can be attributed to three factors: (1) the difference between the average interest rate on the debt and the growth rate of GDP; (2) the size of the primary surplus; and (3) the net impact of capital revenues (IBRA asset recovery, privatization) less off-budget losses (contingent liabilities, bailouts). The projections reported here are based on a simple accounting framework that incorporates these factors, and which has been used in earlier analyses of Indonesia's debt dynamics. 1 While obviously a much worse outcome than the original scenario, in formal terms this scenario is still "sustainable", since the technical definition of sustainability requires only that the government debt/GDP ratio not rise over time. 12 The key contingent liabilities include: (a) guarantees covering domestic banks' liabilities (excepting equity, of course); (b) obligations to private infrastructure providers (mainly in power generation, but also in toll roads); (c) obligations of minimum pension payments to civil servants; (d) off-budget government-sponsored credit schemes to the private sector; and (e) guarantees extended to some private sector entities to restore the flow of credit. 22 followed by slow recovery; (5) 2 percentage point drop in fiscal surplus/GDP ratio; and (6) off-budget contingent liabilities (increased bank bailouts, etc.) equivalent to 6 percent of GDP requiring financing over the 2002-2004 period. 1.53 The dimensions of this "crisis" would be considered quite serious for most countries, although they pale in comparison to Indonesia's experience in 1997. The net effect would be to drive debt ratios upward during the crisis period (2002-04) until they are above their previous peak in 2000. But once stability is restored and some growth resumes from 2004 onward, the government-debt GDP ratio begins to decline once again. By the end of the decade, debt levels remain virtually unchanged from today. The salient point is that current high levels of government debt make Indonesia more susceptible to external or domestic shocks, increasing its vulnerability and limiting feasible policy options open to policymakers. 1.54 None of these analyses explore the possibility that the government may, at some point, be tempted to monetize part of the budget deficit - sparking inflation, raising nominal interest rates sharply, and triggering rapid depreciation of the rupiah. This would place the economy in a vicious circle - macroeconomic instability would lead to higher deficits which in turn would be monetized, contributing to yet higher inflation. Thus, while lowering debt ratios is feasible in a stable environment, the task becomes much more difficult in an unstable one. 1.55 This analysis yields a number of conclusions about the importance of debt management and fiscal sustainability. First, growth and stability are essential - so sticking with the discipline of the IMF program will yield high returns in the long run. Second, new borrowing should be done prudently, in support of high priority public expenditures, and subject to best-practice financial controls and procurement procedures. Third, efforts must be made to recover some of the costs incurred during the crisis through the restructuring and sale of assets acquired by the Government. Fourth, prompt action must be taken to mitigate risks and ensure that no additional contingent liabilities emerge that would require budgetary resources (and hence more borrowing). Fifth, seeking the best possible terms on new financing - including through increased use of IDA, ADF, and grants - will help minimize the debt service burden. And sixth, seeking opportunities to lower debt-service temporarily, including through rescheduling under internationally accepted rules, will assist fiscal sustainability in the short-term. 1.56 Finally, developing a strong debt management capability is essential. While the preceding analysis has focused largely on the quantitative aspects of the debt situation in Indonesia, several institutional issues deserve mention as well. The first concerns the critical need to enhance government capacity for strategic debt management. The current fragmentation of data collection and control limits the ability of Government to monitor trends in the debt, and hampers efforts to anticipate and respond to emerging pressures or sudden shocks. Ongoing efforts to develop an effective Debt Management Unit in the Ministry of Finance need to be intensified. Given the importance of domestic debt in the government's debt portfolio, and the close connections between domestic and external debt, it is critical that the unit be responsible for both (unfortunately, the unit handling domestic debt is currently different from the one responsible for external debt). This joint unit should 23 be in a position to: implement the Government's debt management strategy; analyze alternative debt management scenarios, with especial attention to key uncertainties such as contingent government liabilities, asset recovery/sale options, and portfolio risks (refinancing, currency, and interest rate risks); and advise policymakers on the costs and benefits of different options. 1.57 Very soon, large amounts of government debt will reach maturity. While some of this maturing debt could be redeemed, the bulk will probably need to be refinanced. To do so in an orderly fashion and without affecting macroeconomic stability will require an effective bond market - which essentially means creating the institutions, regulations, and procedures needed for a functioning market. Conclusion 1.58 Economic growth slowed, and inflation climbed in the first half of 2001. The poverty rate, which had declined significantly between 1999 and 2000, has probably budged little since then. The events of September 11 and their effect on the global economy, will almost certainly slow the economy further. We project the economy to grow 3.3 percent in 2001 and 3.5 percent in 2002. In comparison to projections for other crisis economies in East Asia, this may appear quite good. But it is of concern for Indonesia - especially since this outlook faces innumerable risks from domestic and external sources. Of greatest and immediate concern is fiscal sustainability. The high level of government debt not only imposes a big burden on the budget, but is itself a cause of instability. Maximizing fiscal effort and bringing down the debt ratio will be essential in restoring stability and laying a foundation for sustainable growth - both prerequisites for poverty reduction. 24 2. STRUCTURAL REFORMS FOR GROWTH 2.1 Indonesia's growth prospects appear to be less than cheerful. And the downside risks are worrying. Yet growth is an important prerequisite for poverty reduction. It brings with it increased employment, generates the resources necessary for investments in human and physical capital, and stimulates shifts in the structure of the economy toward higher productivity activities. In Indonesia, the Government's indebtedness precludes it from sustaining economic recovery through fiscal means. The private sector engine must, therefore, provide the traction. But for the private sector to succeed will require progress on two fronts - first the removal of structural constraints that impede private investment; and second, the development of institutions that improve the quality of governance, especially in the justice sector. This chapter deals with the first, focusing on five priorities - in the short-term, transferring productive public assets to the private sector and restructuring the debt of corporates; and in the medium term, reforming the financial sector, reshaping sectoral policies (using the examples of energy and agriculture), and promoting a responsive yet responsible private sector. Moving public assets to the private sector 2.2 Now that the banking system has largely been recapitalized, the focus of Government must decisively shift toward moving financial assets back to the private sector. There are two reasons why. The first is budgetary. Indonesia's bank recapitalization costs (as a share of GDP) were the costliest the world has seen - and it is only appropriate that IBRA makes every effort to recover the value of the assets (estimated "fair value" of Rp. 168 trillion as of year end 2000) in its care to ease the government's debt burden. The second is to sustain the recovery. By selling its assets and returning them to the private sector where they can be used most productively, the Government will signal its commitment to private sector led growth, help attract capital back to the economy, and stimulate new investment. 2.3 Broadly speaking, IBRA possesses three types of assets - non-performing loans, non-loan assets (largely shareholdings and property), and majority equity stakes in eleven recapitalized banks. Selling assets in each of these three categories requires different strategies and considerations. 2.4 In 2000, IBRA did a good job in achieving its asset recovery objectives. It raised 96 percent of its Rp.18.9 trillion recovery target through loan collections and asset sales, including some of its SME and residential mortgage loan assets. But IBRA's net asset recovery targets for FY01 of Rp. 37 trillion (Rp. 27 trillion in cash and Rp. 10 trillion in bond swaps) were considerably more ambitious, requiring an acceleration in the pace of asset disposal and corporate debt restructuring. By the end of the third quarter in 2001, IBRA had raised Rp. 18.6 trillion in cash from asset sales and redeemed Rp. 5.2 trillion worth of bonds from recapitalized banks (Table 2.1). IBRA has, however, transferred to MOF a slightly higher amount of Rp. 19.8 trillion, which was met by drawing down part of its reserves. 25 2.5 Sale of loan assets. To achieve its target for the year within the next two months, IBRA has offered for sale several loan packages. IBRA has also outsourced the bulk of its medium-sized loans (which are slated to be sold in the first quarter of 2002) and launched the sale of its first set of restructured corporate loans and related equity stakes. Additionally, IBRA has sold a portion of its SME and residential loan mortgage book. To settle the outstanding obligations of smaller borrowers, EBRA has introduced new interest discount and foreign exchange rate incentives. All loan sales are to occur through transparent and competitive sale mechanisms. 2.6 IBRA's recovery rates so far - about 49 percent on restructured corporate loans and 33 percent on un-restructured SME/retail loans - are reasonable. It is unrealistic, however, to expect future loan recovery rates in excess of 33 percent since IBRA's remaining loan assets are mostly low quality (mainly category 5) loans. 2.7 Sale of non-loan assets. IBRA expects to achieve revenues of about Rp. 10 trillion from the sale of its shareholdings in more than 20 companies. Agreement of the concerned forner bank owners has been provided and international advisory firms appointed for virtually all the proposed sales. 2.8 Privatizing recapitalized banks. Selling assets in the third category - equity holdings in recapitalized banks - is not proceeding smoothly. Their tepid financial performance has not helped. Loan-to-deposit ratios are below 25 percent. After lengthy and intense debate, Parliament recently agreed to sell up to 51 percent of BCA (over and above the 22.5 percent equity that was sold last year) and 51 percent of Bank Niaga. The majority stake sales of these two banks, scheduled for completion by end 2001, are considered a litmus test of the Government's seriousness in reforming and restructuring the banking system. Yet there continues to be uncertainties surrounding both. Any restrictions on the amounts that can be sold to strategic investors will not only reduce the bid price for the shares, but likely deter the best, most competent international banks from investing in them. 2.9 The Government is also considering creating a "power bank" through the merger of some smaller IBRA banks. While further consolidation within the banking sector is overdue, a generalized, forced merger of IBRA banks would delay privatization and produce a large unmarketable bank with a weak capital base and poor risk management systems. Such a bank would likely soon need rescue and recapitalization, adding further to the already enormous public cost of bank restructuring. It would be far wiser to sell these institutions to the private sector as soon as possible, and then allow market forces to dictate the direction of mergers and acquisitions within an appropriate regulatory framework. 2.10 Privatizing non-financial state-owned enterprises. No privatization transactions were concluded in 2000, and consequently there were no proceeds to set against the budget target of Rp. 6.5 trillion. An identical target was adopted for 2001, with 16 state enterprises slated for privatization. So far, the results have been identical too, and prospects for reaching the target appear slim. 26 Table 2.1 IBRA's cash recoveries, end September 2001 (in Rp. trillion) Actual 2001 Success rate target (%) Sale of loans 9.4 14.7 64 Sale of non-loan assets 6.7 10.7 63 Sale of bank equity 0.5 2.3 22 Other income 2.7 1.8 147 Gross cash recoveries 19.3 29.5 65.0 Net cash recoveries 18.6 27.0 69.0 Bond redemption 5.2 10.0 52.0 Note: Net recoveries include deductions for recovery costs. Source: IBRA 2.11 Raising funds for the budget is an important consideration for privatization. But it is not the only one. It is also a core component of the Government's broader strategy for re-invigorating the economy and enabling rapid and sustainable growth. There is now overwhelming international evidence to show that privatization improves the performance of firms and economies. The data show that privatized firms display improved efficiency, profitability, employment, and growth. More important, cross- country evidence indicates that for every 1 percent of GDP privatized, overall GDP and employment climb by about 1 percentage point and 0.25 percentage points respectively the first year, and 0.8 percentage points and 0.5 percentage points the second. And these gains extend into the years beyond. 2.12 Opponents of privatization urge delay, arguing that asset prices will rise later. But buyers are scarce and asset prices low largely because investors are skeptical about the Government's seriousness in privatizing state assets. Asset prices will rise if there is investor interest, and investor interest will grow if the Government establishes a track record of successful privatization transactions. Moreover, it makes financial sense to delay asset sales only if asset prices are expected to increase faster than the rate of interest - about 17 percent a year currently. Asset values in Indonesia have not been rising anywhere near this rate, and in many cases, have fallen. 2.13 In short, the case for moving ahead with privatization is compelling. But what is the best way forward - especially given opposition in Parliament? The logical choice would be to start with privatizing small firms operating in competitive markets (where transactions would be simple), develop a track record, establish credibility, and then move on to bigger transactions. But Indonesia does not have that luxury. The needs of the budget dictate that large SOEs be privatized quickly. Unfortunately, privatizing such 27 firms is never simple - they tend to have legal or contractual impediments, occupy a position of natural monopoly, or have substantial political support for keeping them in the public sector. 2.14 Privatization requires strong political commitment at all levels. To obtain and align this commitment, the Government needs to: > First, reach agreement with Parliament on a state enterprise restructuring and privatization strategy, following which Government should be allowed the freedom to proceed with individual transactions provided they are consistent with it. > Second, establish credible regulatory arrangements for industries that enjoy a natural monopoly. Responsibilities for ownership, policy-making, and regulation need to be clearly separated, with regulatory agencies being competent, transparent, and insulated from Government intervention. > Third, ensure transparency in privatization transactions. > And fourth, avoid granting privatized companies any of the benefits - special tax treatment, subsidies, sovereign guarantees, preferred interest rates on bank loans - these firms may have received as state enterprises. But at the same time, Government should also eliminate their social obligations. Corporate restructuring 2.15 The previous section focused on transferring assets from the public to the private sector. But there are many private corporates with unresolved debt repayment problems (Table 2.2). Banks are understandably unwilling to lend to them until their debts are restructured. Table 2.2 Estimates of corporate debt in Indonesia, end 2000 (Rp. trillion) Onshore Offshore Total (est.) Performing 25 34 59 Non-performing 37 23 60 Total 62 57 119 Source: JITF 28 2.16 Corporate debt restructuring is occurring through three avenues. First, the Indonesian Banking Restructuring Agency (IBRA) - holder of the bulk of distressed loans - is actively engaged in restructuring corporate debts. Second, the Jakarta Initiative Task Force (JITF) mediates restructuring negotiations between corporate debtors and creditors (often foreign creditors) and expedites needed regulatory approvals and regulatory relief. And third, private sector-led debt restructuring negotiations have occurred spontaneously - with no govemment involvement. 2.17 Corporate restructuring through IBRA. IBRA's mid October 2001 credit portfolio had a book value of Rp. 269 trillion. About 2 percent of its debtors accounted for almost 96 percent of loan assets, while some 194,153 small debtors (98 percent of the total debtors) with average debts of just Rp. 50 million accounted for 4 percent. 2.18 Early on, IBRA chose to sell its SME, retail, and commercial loans - but restructure the large corporate debts (Table 2.3). Only a very small proportion of such restructurings have actually been completed (Table 2.3). IBRA is finding it difficult to close deals. Many remain stuck in litigation. And debtors remain reluctant to move beyond the MOU stage, because this would mean disposing assets, accepting equity Table 2.3 Status of IBRA corporate debt restructuring, September 2001 (Amounts in Rp. trillions) Obligor group Early stage a/ Middle stage b/ Late stage c/ Completed d/ Total Top 21 4.3 2.7 68.9 14.9 90.8 5% 3% 76% 16% Next 22-200 13.5 32.8 37.4 17.8 101.5 13% 32% 37% 18% Remainder 11.3 14.6 19.4 5.0 50.3 (201 onward) 22% 29% 38% 10% Total 29.1 50.1 125.7 37.7 242.6 12% 21% 52% 16% a/ Early stage includes no action on workout or legal proceedings; prelimninary negotiation; or standstill agreement. b/ Middle stage includes assignment of advisors; due diligence; or restructuring negotiations. c/ Late stage includes finalization of a workout MOU or initiation of legal action. d/ Completed includes loans that are in stages of implementation, full payment or disposal. Figures exclude retail/SME, SOEs, interbank claims, affiliated and non-resident loans. Source: IBRA 29 dilution, or paying creditors. Unfortunately in Indonesia, recalcitrant debtors seem to ignore the bankruptcy law with impunity (see below), and IBRA has little confidence of prevailing in the courts. 2.19 Out of court workouts. The Jakarta Initiative Task Force (JITF) was created to facilitate and mediate between debtors and creditors to help reach agreement out-of-court in debt restructuring negotiations. It also helps eliminate tax, legal, or regulatory impediments to corporate restructuring transactions on a case by case basis. More recently, it has been authorized to provide incentives (for example, tax or regulatory relief) to motivate quick resolution, or impose sanctions to penalize non-cooperation. 2.20 In April 2000, the JITF reviewed its docket of 214 cases and dismissed 154 cases where there was no realistic chance of restructuring or willingness to cooperate. After the first quarter of 2000, cases averaging $2.0 billion were added to JITF's docket in each quarter (Table 2.4). Some were FSPC referrals of cases where IBRA is a minority creditor. By mid October 2001, tern sheets had been signed for 60 cases totaling $12.4 billion in debt. About 50 percent or 30 cases with an amount of $4.6 billion have moved beyond the term-sheet stage to formal legal documentation and implementation. Table 2.4 JITF's Caseload ($ billions) Added during Completed Cumulative Active at end period during period completed of month 1999 n.m. 1.30 1.30 23.0 2000:Q1 n.m. 0.67 1.97 6.67 2000:Q2 2.28 0.24 2.21 8.71 2000:Q3 3.64 2.96 5.17 9.39 2000:Q4 2.02 4.19 9.36 7.22 2001: Ql 2.07 1.04 10.4 8.0 2001: Q2 1.56 1.7 12.1 7.6 2001: Q3 1.75 0.08 12.21 9.3 Source: JITF 2.21 Quality of IBRA and JITF corporate debt restructuring. Corporate debt restructuring agreements that have successfully reached the MoU stage have the following features (Table 2.5): 30 Table 2.5 Use of debt restructuring methods, July 2001 Non-official IBRA: IBRA: IBRA: (outside Top 21 Top 22-50 rest JITF IBRA/JITF) Debt restructured (Rp. Trillion) a/ 74.8 14.9 13.8 81.6 16.6 No. of cases n.a. n.a. n.a. 43 20 Rescheduled (in percent) 27 40 32 57 81 Average term (years) n.a. n.a. n.a. 7 5 Grace on principal (percent n.a. n.a. n.a. 66 n.a. escheduled) Length of grace (years) n.a. n.a. n.a. 2 n.a. Converted to equity (percent) 12 30 7 27 11 Converted to convertible bonds 42 13 22 8 0 (percent) Other (percent) b/ 19 17 39 7 8 a/ Includes past due interest and penalties for IBRA cases. b/ Includes cash payment, debt buyback, debt/asset swap, and debt cancellation. Note: Data for JITF is for January 1, 2000 to July 30, 2001. Exchange rate used was Rp. 8,000/US$ 1. Source: JITF compilation, including IBRA data as well as reports from Bisnis Indonesia and Kompas. > IBRA deals have rescheduled a lower proportion of debts than deals by other creditors. More recently, the Government has finalized agreements on key large debt restructuring cases, including Chandra Asri. > IBRA's top 21 deals rely heavily on debt conversion - 42 percent into convertible bonds and 12 percent into equity. The future ability of IBRA to recover substantial portions of its assets at value hinges on the success of these companies. > JITF agreements - in which foreign creditors are major participants - feature higher levels of debt rescheduling (57 percent) and debt-equity conversions (27 percent). While 16 debt-equity conversions have been agreed under JITF (but not implemented yet), six would give majority control to creditors. If MOUs are implemented, as much as 42 percent of debt could be extinguished, of which debt-equity conversions accounting for 27 percent, debt to convertible bond conversion 8 percent, debt buyback 3 percent, cash repayment 2 percent, and debt cancellation 2 percent. 2.22 Even where IBRA has reached agreement with corporate debtors, the quality of restructuring has been questionable. The Government adopted a new set of corporate debt restructuring principles in April, 2001 to ensure more transparent restructuring agreements consistent with international best practice and to share the financial burden more equally between debtors, creditors and taxpayers. In accordance with these new 31 principles, IBRA's Oversight Committee (OC) recently reviewed the first 31 MoUs between IBRA and its top 21 obligors, citing numerous deviations in each. So far, the Financial Section Policy Committee (FSPC) has published its response to only 13 such reviews. 2.23 Creditor rights and insolvency. One of the reasons for the poor quality of corporate debt restructuring deals is the absence of a credible threat of bankruptcy. Creditors have found that they can rarely expect to prevail in court proceedings to enforce claims in cases of insolvency. Enforcement of unsecured or secured debt are subject to successive appeals by debtors to the District Court, the Court of Appeals, and through cassation procedures to the Supreme Court. There is also the possibility of a civil review before a different chamber of the Supreme Court. All this results in a lengthy and expensive judicial process.5 There is also ample scope for anomalous judicial decisions that - from the perspective of fact or law - are unfathomable. 2.24 Indonesia's new bankruptcy law provides for equitable treatment of creditors, corporate reorganization, and preservation of assets. Intended to be read together with the Civil Code and Commercial Code, the law is not implemented properly, for a variety of possible reasons: 6 * Corruption. * Several decisions demonstrate that the Commercial Court appears not to fully understand the law or the principles underlying it. * Administrators and supervisory judges tend to be inexperienced, particularly in asset recovery and business reorganization. * If a judgment is made against a debtor, enforcement largely depends on the debtor's cooperation. * Uncooperative debtors have many avenues with which to disrupt implementation of legal decisions not in their favor. Securing police assistance is difficult. 2.25 One recent case (see Box 2.1) indicates the potential ability of debtors to use provisions of the Bankruptcy Law to obtain court ratification of shady composition plans to the disadvantage of bona fide creditors. 5 White & Case LLP and Ali Budiardjo, Nugroho, Reksodiputro, "Legal Issues: Indonesia," in Guide to Restructuring in Asia 2001. 6 Pricewaterhouse Coopers, "Financial Issues: Indonesia," in Guide to Restructuring in Asia 2001. 32 Box 2.1 Phantom creditors put IFC in a (noodle) soup: the case of Panca In February 1998, Panin Overseas Finance stopped all payments of interest and principal due on its loans of around US$60 million to its creditors, including several foreign banks and IFC, a member of the World Bank Group. In 1999, the company name was changed to PT Panca Overseas Finance ("Panca"). Two separate audits by international accounting firms established that Panca had over US$40 million in assets, including US$25 million in cash. So the creditors rejected a plan that would return 17 percent of credits. Instead, in early September 2000, the creditors petitioned the commercial court to declare Panca bankrupt. The Commercial Court postponed the case for a month. When the court reconvened, Panca claimed to have drawn down Rupiah 1.6 trillion (US$175 million) in new unsecured loans during the month-long break. The loans, Panca claimed, had been arranged by Harvest Hero, a Hong Kong registered company with 13 other companies, based in Western Samoa and Bahamas. Panca claimed that the entire US$175 million in new loans had been used to purchase "factoring receivables" from a British Virgin Islands company that then defaulted the entire amount, so these new funds were not available to meet creditor claims. The creditors protested that Panca had created these fictitious creditors to block the bankruptcy petition. They provided evidence that Harvest Hero had paid-up capital of HK$2 (25 US cents), no telephone listing in Hong Kong, and no permit to lend money there. Similarly, until recently, all other syndicate members were offshore shelf companies in tax havens and none of them had engaged in international finance in their respective jurisdictions. Harvest Hero's registration listed the address of one of the directors who had signed the loan agreement with Panca. The address turned out to be a small North Jakarta chicken noodles restaurant, whose proprietor had never heard of the director or Harvest Hero. Although the director had signed the loan agreements in July 2000, he was appointed as a director in Harvest Hero only in September 2000. The Commercial Court, however, decided that the 14 new creditors were legitimate and allowed them to vote on the Company's composition plan. IFC appealed the Commercial Court decision, but the Supreme Court turned them down, reasoning that the new creditors were legitimate unless proven fraudulent by a court of law. EFC has petitioned the Supreme Court to re-open the case based on new evidence and the case is still under review. Reforming the financial sector 2.26 More than four years after the onset of the crisis, some progress has been made in stabilizing and recapitalizing banks. But the banking system remains vulnerable to further shocks, non-performing loans remain high, and intermediation margins are thin. Some banks have low capital adequacy ratios and face declining profitability, faltering progress in their debt restructuring, and slow resumption in new lending. Unfortunately, much of the official data on bank performance is of low quality, so conclusions have to be 33 Figure 2.1 Some progress in performance of the banking system Loans are increasing in real terms... .... with most loans going to industry and trade... (percent growth in loans adjusted for inflation) (share of loans by sector) Percent 6.0]ter 4.0 Idsr 2.0 Construction & 0.0* transport -2.0 -Mining, gas, utilities -4.0- -6.0 Agriculture -8.0 . Trade Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 ... while the capital assets ratio is rising.... ....and the non-performing loan ratio isfalling. (capital-assets ratio - unadjusted for risk weights) (non-performring loans as a share of total loans) Percent Reserves (IDR trillion) NPL ratio NPL (percent) 15 0 4001 19.0 350 -18.5 300 ~~~~~~~~~~~~-18.0 5.2 6.1 250 -17.5 5 0 L~ () .oan loss reserves 17.0 150- 0.6 1)100- -16.5 QII/QO ~~~~~~~~~~~~~~~51-F] [1 [1 Fl -16.0 Q 11/00QIII/00 QIV/00 QI/ol Q II/Ol 0. 15.5 LoDec-00 Jai-01 Feb-01 Mar-0l Apr-01 May-01 Jun-01 -5.0 Source: World Bank staff estimates based on Bank Indonesia data. tentative. With this caveat in mind, a brief survey of banking system performance reveals the following (Figure 2.1): * Lending. Bank lending seems to be staging a recovery, but it is hesitant and may be faltering, and clearly inadequate to support substantial increases in investment. Moreover, the data are such that it is difficult to differentiate between defensive lending (which serves to rollover repayments) and loans for genuine new investments - and may therefore exaggerate the recovery in the banking system. * Liquidity. System-wide liquidity is relatively stable, with 31 percent of liquid liabilities covered by liquid assets. But many banks have experienced liquidity pressures this year. After adjusting for exchange rate changes, during the second quarter of 2001 nationalized banks had the highest increase in deposits, while 34 recapitalized private banks and foreign banks experienced a decrease. The high concentration of short-term bank deposits from non-bank financial institutions is expected to create liquidity pressures in the near term as these depositors pay year- end obligations or seek other investment alternatives. State-owned banks, heavily reliant on SOE depositors, are also likely to face more severe pressures. * Earnings. Rising interest rates and an unstable Rupiah meant that net interest margins (interest income minus interest expense) fell further. Banks with mainly fixed rate bonds in their book suffered the most, but banks with poor quality loans were also affected negatively as they needed to increase reserves for loan losses when loans were downgraded. * Non-performing loans. Non performing loans reported to Bank Indonesia declined to 16.6 percent in June 2001. At the same time, reserves for loan losses also decreased, indicating that banks had written off some bad loans. There are growing concerns that the NPL rate may be higher than reported, especially as a recent Bank Indonesia survey found many banks had not properly classified their loans in accordance with prevailing regulations. A higher NPL ratio would require banks to (again) raise their loan loss reserves which, in turn, will negatively affect their capital position. i Capital. The ratio of capital to total (unweighted) assets has climbed steadily. System-wide, banks still reported profits, which retained earnings. This profitability could be the result of reclassifying loans as performing assets - and there is some concern whether this is appropriate. Some banks, mostly small, still have a capital adequacy ratio less than the required 8 percent and may not reach the target by year end. So the solvency of the banking system remains tenuous. The assets of many banks are dominated by government bonds. By June 2001, banks had shifted only 12.8 percent of their government bonds (totaling Rp. 439 trillion) from the investment to the trading portfolio, a move which involves marking these bonds to market (in August 2001 such government bonds were traded at an average of 83 percent of face value). As banks start lending more and apply risk weights for new loans, solvency could be expected to deteriorate. 2.27 Bank and corporate restructuring is to undo the excesses and mistakes of the past. But what about the future? One opportunity from current crisis in Indonesia is the chance to build the foundations for an efficient and safe financial system. Weaknesses in the financial system played a major role in the 1997 crisis, and despite many reforms, progress has been limited. Government and parliament need a common vision of the Indonesian financial sector - and then work together to make it a reality. Much of the focus will need to be on the banking sector, because of its large size and its importance to macroeconomic stability. But other elements are also important. If the Government were to prepare a financial sector strategy - as a road map for the future - then the following five broad issues would be sure to be part of it. 2.28 First, ensure banks are safe and strong. Weak banks must not be allowed to threaten the viability of the entire banking system. The chances of further crises can be minimized if incentives are in place to encourage good lending practices and sound risk 35 management. One such incentive (or, rather, disincentive) is the threat of closure or sanctions from an effective regulatory and supervisory system. 2.29 True, sale or closure will involve expenditures up-front, but will reduce costs over the medium-term and generate market confidence. Doing so is important to the central bank's credibility. Government should give its support for sound supervision and prompt intervention when a bank's finances are found to be fragile. For example, supervisors should not be fearful of intervening well before a weak bank's capital is exhausted. And there should be every effort made to move towards new standards. Better enforcement of existing regulations would help. 2.30 As another measure to further strengthen recapitalized banks, Government needs to convert a portion of fixed rate recapitalization bonds to floating rate bonds - for two reasons: to improve intermediation margins; and to stimulate a secondary market for recap bonds and thereby increase liquidity. This again will involve up-front costs. But the benefits of such an action will far outweigh its costs. 2.31 Second, decide the future of state banks. In the future, a key issue is the share of govemment owned banks in the banking system. The Indonesian authorities have announced their intent to reduce this. The Government is committed by end 2001 to put forward its strategy for the divestment of its four state-owned banks - Bank Mandiri, BNI, BRI and BTN - which account for one-half of the banking system's liabilities.' 2.32 While state banks are being prepared for privatization, they should be the subject of intense central bank scrutiny to ensure they avoid bad lending. It is possible that some state banks may remain government owned. If they do, it may make sense to turn them into "narrow" banks (banks accepting deposits but holding only government debt) to limit any proclivity for bad lending and to keep their capital base as small as possible. Converting some state banks into narrow banks is not as big a step as it might seem - some state banks already have government bonds that account for 70 percent of their total assets. 2.33 To improve the performance of state banks and prepare them for successful divestment, the government should establish "best practice" governance structures and procedures for each. At the same time, it is important to press ahead with the operational restructuring of state banks. The Monitoring and Governance Unit (initially within the Ministry of Finance but to be transferred to the Ministry of State-Owned Enterprises) has begun monitoring their performance against financial and restructuring milestones contained in their business plans and performance contracts. The future of BTN and the handling of its portfolio will need to be resolved in the context of the Government's policy decisions on continuation of housing finance subsidies and its overall housing finance policy. Further issues that remain to be addressed in Indonesia's state banks include: 1 These commitments are made in the letter of intent to the IMF dated August 27, 2001. 36 * the quality of the debt restructuring conducted and the quality of the remedial loan portfolio; * clarity in representation of portfolio quality; * the pace of operational restructuring (including rationalization of branch networks and staffing levels, improvements in credit practices, risk management and in external and internal governance issues); * periodic re-evaluation of the realism in underlying assumptions (growth, revenues, etc.) underpinning the finalized business plans in each bank. 2.34 Third, remove the blanket guarantee eventually - but not just yet. The blanket guarantee will be risky to remove until confidence in macroeconomic stability is restored, the banking system is stronger, and the government has built a reputation for effective supervision. Nor would removal now reduce the Government's contingent liability by much. After all, the Government owns virtually 80 percent of the banking system (and will remain, de facto, a guarantor of the banks it owns), and owes a substantial amount of debt to the banks. But blanket guarantees of such magnitude encourage banks to follow high risk strategies (moral hazard) and lower incentives for depositors to seek well-managed banks. Indeed, we have already noted that deposits have been rising fastest in nationalized banks (see above). So eventually the blanket guarantee must be removed. One way to do it is to lower the interest rate ceiling gradually for all guaranteed deposits - thereby encouraging depositors to judge for themselves the risk premium they would require for depositing non-guaranteed funds in banks. 2.35 Fourth, provide the poor with access to financial services.2 This will entail: * A coherent strategy for developing the rural and micro-finance market and unification of the current plethora of programs under a single responsible authority with powers to implement this strategy; o The Government's partnering with emerging coalitions of micro credit providers that focus on sustainability of micro credit, and encouraging links with the formal credit system; * Returning to market-based credit allocation and interest rates, and adequate evaluation and collection efforts, as for example, in BRI programs, while eliminating the post-crisis, unsustainable, subsidized credit programs; * Improving the legal system related to titling and pledging of collateral, the information on small borrowers, and other institutional mechanisms for lending to rural and micro borrowers. 2 See also the SME section in this chapter. 37 2.36 Fifth, develop the bond market. We already noted in Chapter 1 how important a liquid bond market will be when refinancing recapitalization bonds upon maturity. The bond market can be developed through a steady issue of government bonds, transparent auctions, an effective payments system, and the establishment of a registry. It will also contribute to money and debt market development. Passage of the long-delayed Government debt law is needed to move forward in this area. 2.37 The equity market is small and, while equity sales can be used to privatize firms, the market's limited capacity to absorb new issues and improve corporate governance should not be overstated. The capital market would benefit from better information, which is necessary for better governance and market discipline. Regulation, though improving, is still an issue in the minds of many potential investors. More generally, the equity market is unlikely to take-off until macroeconomic stability returns and demand increases as a result of growth in mutual funds (with a corpus of appropriate regulations ensuring transparency), pension funds and insurance companies. And for this, as with banks, the pension and insurance sectors would benefit from improved governance, regulation, and supervision. Improving agricultural policy 2.38 The challenge in agricultural policy is that commodities produced by small farmers are also important in the consumption baskets of poor households. Indeed, many rural farm households are net consumers of basic food items, such as rice and soybeans (Box 2.2). Trying to help small farmners through a high price policy, supported by import tariffs, usually hurts poor households, including many poor farmers. It also increases input costs to industries that employ the poor, consume their output, and supply their inputs. Box 2.2 Soybeans: protein for the poor Soybeans are an important source of protein for the poor in Indonesia. Unfortunately, this is given scant regard by growers' representatives who want an import duty on this commodity. Production in Indonesia is marginally competitive at best, and for years, imports have filled a major part of annual needs. Implementing a tariff on soybean imports would shift agricultural resources into a marginally competitive crop activity, raise costs to poor consumers and potential processors, and detract from establishing an integrated, efficient domestic processing capacity. A better approach would be to make available improved seeds and disseminate superior planting practices, to help generate higher yields and returns. 2.39 To distribute the benefits of growth broadly among the rural poor requires a multi-dimensional strategy based on productivity improvements, not one where farmer incomes are artificially and expensively propped up through trade protection. Such a strategy will include reforms ranging from granting farmers freedom to choose their 38 crops to reinventing public institutions such as extension services. Government funding of agricultural research remains an important public function and could be enhanced to reverse recent erosion of budgets. On the farm input side, more aggressive liberalization of fertilizer production and supply is needed to increase market competition and service standards. Rural micro-finance policies must move away from subsidized credit programs and toward strengthening institutions delivering micro-finance. For land, both rapid improvements in land certification and administration, and multi-stakeholder formulation of a broader, medium-term agenda for broad land policy reform, will begin to provide farmers with greater security when investing in land improvements. Finally, providing a healthy environment for farmers to create member-driven, enterprise-oriented organizations, such as cooperatives and water user associations, will help generate efficiencies in production and marketing. 2.40 Rice policy. In January 2001, the Government created an interdepartmental working group to formulate a national rice policy that would take account of these issues. This team has produced working papers and a technical proposal on future rice policy.3 This proposal was presented and discussed in various public meetings.4 The core of this technical work is drafted into a proposed Inpres Tentang Penetapan Kebijakan Perberasan which (as of October 2001) is still with the Coordinating Minister for Economic Affairs for further action. 2.41 The rice economy has undergone abrupt and wide-ranging changes since 1998. The Government no longer subsidizes all consumers through sales from public stocks to the market. Instead, it provides rice at a subsidized price only to poor households (OPK). The State Logistics Agency (BULOG) no longer monopolizes rice imports and private imports are allowed, subject to a specific tariff (equivalent to about 30 percent ad valorem). Manipulation of customs procedures and outright smuggling, however, blunt this trade instrument. BULOG also no longer has access to cheap capital from the Central Bank, and thus relies on commercial sources for its credit and the government budget for its subsidies. BULOG is also charged with supporting a floor price for farmers that has climbed well above the world price and which it has not been able to support in the previous two peak harvest seasons. 2.42 The institutional, financial, and policy dimensions of rice policy are thus in transition. In developing its national rice policy, Indonesia needs to look beyond calls for a protected domestic rice market and develop a more robust rural incomes policy, since rice represents a small and declining share in rural incomes. Less than half the income of poor rural households comes from agriculture, only a fifth from rice. Propping up the price on commodities that are a declining source of producer income is a losing - and expensive - proposition. So the new national rice policy needs to be set in the broader objective of raising living standards in rural areas through broad productivity gains - 3 Keputusan Kepala Bappenas no. 005/KA/01/2001 Tentang Tim Pengkajian Kebijakan Perberasan Nasional, Januari 23, 2001. 4 See "Reformulasi Kebijakan Ekonomi Beras Nasional: Hasil Rumusan Tim Pengkajian Kebijakan Perberasan Nasional sebagai usulan alternatif kebijakan bagi Pemerintah" in "Alternatif Kebijakan Perberasan: Tinjauan Kritis Hasil Tim Kajian Kebijakan Perberasan Nasional," Pusat Studi Pembangunan, Lembaga Penelitian IPB, Juli 2001. 39 from on-farm as well as off-farm activities. In this context, the following four broad points need to be considered: * Price policy. The floor price for paddy is unsupportable. An alternative is to set a procurement price for rice needed to maintain emergency stocks and the subsidized rice program for poor households. Concentrating such purchases in the peak harvest period would attenuate the price decline that inevitably occurs at that time. * Trade policy. The current policy balances producer and consumer interests. Tariffs should be capped at the lowest level that is considered politically acceptable, and then should be reduced over time according to a pre-determined schedule. During this period, there should be no non-tariff barriers, imports should remain open to private participation, and BULOG imports should operate by the same rules. * Role of BULOG. BULOG's mandate should be to maintain emergency rice stocks, operate the subsidized consumer rice program (OPK), and procure for these public programs during the peak harvest season. A new Keppres specifies that Bulog will be coordinated by the Minister of Agriculture, and that it will become a BUMIN by no later than end-May 2003.5 Bulog is also pressing to regain State Trading Enterprise status and privileges within the WTO framework, on which basis it would reenter into trading in additional commodities. Although a change in BULOG's legal status to a BUMN would bring a change in its accounting rules and hence greater transparency in its financial management, this shift in status should not be accompanied by foray's into commercial trading of commodities for profit. 2.43 Sugar. In January 2000, the Government committed to consolidating and restructuring sugar factories on Java and promoting private investment in sugar off-Java. Four sugar mills were to have been shut down upon completion of the cane crushing season in 2000. Trade policy was adjusted to allow private imports, subject to a tariff of 25 percent that was to be phased down over 3 years. A plan was to be prepared by June 2000 for consolidation of the rest of the Java-based industry, and budget resources to be provided temporarily to firms implementing agreed restructuring plans. 2.44 Little has happened since then. True, trade was opened to general private importers and a tariff introduced. But the Ministry of Finance (MOF) proved unwilling to finance the modest budget costs of the strategic study, let alone the severance costs for plant closures. Indeed, some policy actions contradicted stated policy - for example, the Government loaned Rp. 600 billion to state-owned sugar millers to procure sugar cane at above world prices. In June 2000, the moribund Indonesia Sugar Board was replaced by a National Sugar Board, still composed predominantly of government officials. It too has been largely ineffective in defining a new strategy for Indonesia's sugar sector. 2.45 Fortunately for the sugar industry, world sugar prices have since strengthened and the rupiah has weakened, providing temporary relief to mills and farmers, discouraging 5 Keppres no. 103/2001 tentang Kedudukan, Tugas, Fungsi, Kewenangan, Susunan Organisasi, dan Tata Kerja Lembaga Pemerintah Non Departemen, 13 September 2001. 40 private imports, and reducing the domestic stock overhang (Figure 2.2). For the 2001 cane crushing season the Government has not made any further interventions in market mechanisms and not repeated the previous several years' support package of price support to farmers and provision of working capital to state sugar millers. In addition the Ministry of Agriculture facilitated piloting of a three-way contract among sugar farmers, millers and traders that specified prices and delivery mechanisms for sugar without government involvement. Figure 2.2 Sugar prices are high (Nominal price deflated by non food CPI) 180 170 Sugar 160 150 140 i20= 90 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 Source: CBS 2.46 This pricing arrangement is a positive step. But it is only one component of the strategy needed for consolidation and renewal of the Java-based industry. While implementing this broader strategy in the medium term, the government should: not increase the current ad valorem 25 percent tariff on sugar imports, and perhaps even lower it; close loopholes on tariff concessions; continue to allow private imports; promote extension of the price contract pilot to other production areas; bring new private management and ownership into the sector through sale of the sugar production assets held by IBRA. 2.47 Fertilizer. Policy for nitrogen-based fertilizers (primarily urea) is driven by long- term contracts for natural gas sales to fertilizer manufacturers. These include a large subsidy, so there is an incentive for manufacturers and traders to export nitrogen fertilizer rather than supply the domestic market. This prompted the Government to impose restrictions on exports of nitrogen fertilizer in 2000 and to consider creating segmented market areas in which selected producers and distributors will be allowed to sell fertilizer. Marketing by state-owned fertilizer firms remains under the management of the holding company, PT Pusri. 2.48 In this policy environment, it will be difficult to privatize PT Kaltim, a transaction that has been postponed several times. Investors face large risks from a lack of clarity in long term policy on urea exports and domestic marketing. Moreover, the government is 41 finalizing arrangements for expanding one state-owned fertilizer producer, not yet slated for privatization, thus adding to the risk of potential investors. 2.49 Government needs to clarify long-run policy directions to make progress on needed liberalization of the fertilizer industry. Among the key actions needed are: * designing a formula relating the domestic natural gas price to the international price of urea to eliminate windfall profits to fertilizer companies, unnecessary costs to farmers, and the temptation to restrict urea exports (as is done at present); * allowing each fertilizer firm to sell its own output without hindrance; and * strengthening the fertilizer regulatory system to ensure quality products to farmers. Reshaping energy policy 2.50 Indonesia is blessed with huge energy resources - yet the energy sector is in trouble. The problems are twofold: pricing of energy at unsustainably low levels and a regulatory environment that does not encourage efficiency and probity. Both issues dominate policy concerns in electric power and the hydrocarbon (oil and gas) sector. 2.51 Electric power. The price of electricity remains well below the long-term cost of supply, and PLN continues to record large financial losses. The Government and PLN have actively socialized the need to restore the electricity tariff to a commercially viable level, setting a norninal target of US 7 cents per KWh by 2005. 2.52 While there is no explicit strategy for accomplishing this target yet, several tariff increases have been implemented. Following the 30 percent average increase of April, 2000--which affected primarily large industrial, business and residential consumers- average tariffs were increased by a further 22 percent through a two-stage increase in July and October of 2001. The largest increases this time fell on mid-size consumers, while small consumers - those with connection capacities of up to 450 VA and monthly consumptions of less than 3OKWh - were again protected. Public reaction to these tariff increases has been relatively muted. Unfortunately, the financial benefits of higher tariffs to PLN have been substantially eroded by the further depreciation of the Rupiah. 2.53 Pricing electricity below cost not only undermines PLN's financial viability but contributes to rapid growth in electricity consumption. Clearly, tariffs need to be increased to commercially viable levels and prospective investors need to be assured of earning adequate returns on efficiently managed investments. With virtually no new generation capacity under construction, and no restrictions on new connections, Java-Bali could be facing power blackouts and brownouts in the next few years. Outside Java-Bali, many regions are already facing severe power shortages. 2.54 Implementation of a new legal and regulatory framework will also help. The draft of the new Electricity Law, delivered to Parliament in February 2000, supports key reforms. But some further refinement will be needed to: better delineate the role of local governments in planning, regulation and licensing; better define the jurisdiction of the independent regulatory agency; ensure the principles for tariff-setting are sound and 42 unambiguous; and specify more precisely the role of the proposed Social Electricity Development Fund. 2.55 Finally, long-term agreements have been concluded for a few operating independent power producers (IPPs), notably Drajat and Sengkang, while "close-out" agreements have been concluded for several plants that did not reach financial closing (notably Tanjung Jati A). In addition, the Government has agreed terms for repaying MIGA and OPIC for their claim payments to Enron (Pasuruan) and Mid-American Holdings (Dieng and Patuha) respectively. Intensive negotiations are underway for other operating plants, including Paiton I and Paiton II, but the process has been slow, further impairing prospects for attracting new private investment in the sector. 2.56 Finally, PLN's corporate restructuring commenced in late 2000, and progress has now been made towards decentralizing authority for key planning and management functions. International management consultants were engaged to assist with the next steps in the process, and in particular with the functional unbundling of the Java-Bali businesses. But there have been delays, and concerted efforts are needed to get the program back on schedule. 2.57 In early 2001, the Government approved the restructuring of its loans to PLN for 1998-2000. PLN had been unable to service its debt to Government during this period, and the accumulated arrears and penalties meant PLN's equity turned negative by end- 2000. Part of amount due has been converted into a new Rupiah loan, while the balance has been treated as an increase in the Government's equity in PLN. 2.58 Oil and gas sector. The Law on Oil and Natural Gas was approved by the DPR in October 2001, providing a framework for restructuring the sector. The law strips Pertamina of its monopoly powers, converting it into a state-owned limited liability company (Persero), and establishes an implementing agency to oversee production sharing contracts and a regulatory agency to oversee natural monopolies in the downstream part of the industry. Implementing regulations, which are being finalized, will be crucial to the successful implementation of the law, and should be designed to support the goals of attracting new upstream and downstream investment and of promoting downstream efficiency improvements through effective competition. 2.59 While Pertamina has made a start on internal corporate restructuring to prepare for implementation of the new law, the changes fall short of the major structural reforms needed to enable and facilitate effective competition in downstream operations and to realize potential performance improvements in upstream and downstream operations. 2.60 The fuel subsidy continues to impose a very heavy burden on the budget despite several recent price increases. In April 2001, the Government raised prices for fuel supplied to medium and large industries and to international shipping and fishing vessels. Under this scheme, foreign oil and mining companies, foreign ships, and Indonesian ships operating international services are required to pay full intemational market prices, while medium and large industrial consumers and operators of fishing vessels are required to pay 50 percent of international market prices. The "international prices" are 43 set monthly on the basis of prevailing Singapore market prices in the preceding month.6 The April 2001 increase was estimated to be equivalent to a 16.5 percent weighted average rise in petroleum prices. 2.61 In mid-June, 2001, a further round of price increases were implemented, this time affecting the general public. The price of automotive diesel oil was increased by 50 percent to Rp. 900 per liter, while gasoline was increased by 26 percent from Rp. 1150 to Rp. 1450 per liter. However, the price of kerosene was increased by only 14 percent to Rp. 400 per liter, which is less than 20 percent of Pertamina's published international market price for September 2001 and hence encourages smuggling and its substitution for other fuels. 2.62 In a competitive market economy, there is a strong case for allowing domestic fuel prices to be set in line with international prices, with changes in world prices and/or exchange rates to be fully passed through to changes in domestic prices. This both allows for producers and consumers to allocate resources and consume fuel products on the basis of market-based price signals, and also protects the government from incurring unduly large or volatile fiscal costs. A recent survey of petroleum pricing policies in developing countries showed that almost half of the 45 counties surveyed have either deregulated prices or have in place regulatory mechanisms that allow full automatic pass-through of international price changes.7 The others have established either discretionary or automatic fuel price smoothing mechanisms. However, these have been associated with significant fiscal costs for governments. In Indonesia's case, the need to restore fiscal sustainability and reduce the burden of public debt argues strongly for moving to eliminating fuel subsidies and deregulating pricing policy as soon as possible. 2.63 Indonesia partially moved toward such a system - as part of the April 2001 package (see above). But it is time to move towards a system of automatic price adjustments for all fuel products, while gradually reducing the proportionate difference between the domestic and international price according to a pre-specified path. Revitalizing mining 2.64 Investment in mineral exploration and mine development has all but ceased, and persuading world class investors to return will require the Government to tackle a formidable array of challenges. Of course, there is the pressing need to improve the overall investment climate - which is the focus of the first three chapters of this report. But in addition, there are several impediments specifically discouraging mining investment, which need to be resolved in the context of the passage of the new mining law. These include: * Authority to issue mining licenses. The draft mining law authorizes districts, provinces, and the State to issue licenses depending on the location of the resource. 6 Average MOPS (Middle Oil Platts Singapore) prices for the preceding month, adjusted for octane and specification differences, plus 5 percent for distribution costs and 10 percent VAT. 7 See Giulio Federico et al, "Domestic Petroleum Price Smoothing in Developing and Transition Countries," IMF Working Paper 01/75, May 2001. 44 But this has two problems: first, licenses issued by authorities other than the State - the "legal" owner of the resource - are unlikely to be accepted as security by commercial lenders; and second, such a multi-tiered licensing authority creates the risk of overlapping jurisdictions. * Restrictions on mineral exploration and extraction. The Forestry Law prohibits mineral exploration and extraction in protected forests that cover around 30 percent of Indonesia's total land area - and a decree from the Minister of Fisheries prohibits extractive industries on "small" islands of less than 2000 km2. The prohibited areas include a number of potentially rich mining prospects including two very promising nickel deposits. The Government is right to be concerned with protecting the environment - and to that end, it needs to develop forest and environment management practices which balance the need for development with the need to protect the environment. * Incentives regime. The Government should carry out a full review of various taxes and charges levied by regional governments as well as the center, to see where improvements can be made and the tax structure aligned more fully with international best practice. 2.65 These issues are mostly outside the jurisdiction of the Ministry of Mines and Energy and therefore require inter-ministerial cooperation and coordination, as well as consultation with the major stakeholders (including Parliament). Promoting a responsive yet responsible private sector 2.66 The central thrust of Indonesia's growth strategy is through private investment and production. But one of the important lessons of the crisis is that private sector development cannot be sustained without appropriate attention to small and medium enterprises, corporate governance, and competition policy - all three of which ensure that development is broad based, and that all enterprises compete on a level field and according to well established and understood rules. 2.67 Small and medium enterprises (SME). Most SMIE programs have failed, partly due to lack of coordination, poor program design, and inadequate monitoring and evaluation. The Government has created an inter-ministerial task force to reassess strategy toward small and medium enterprises (SMNEs) and bring cohesion to the many government programs supporting SMEs. Unfortunately, there has been little progress over the last six months. 2.68 The proliferation of licenses, permits, taxes and levies - especially at local government level - impose major costs on SMEs. In addition, SMEs face an "uneven playing field" due to laws and regulations that favor large conglomerates and impose high fixed costs on small businesses. To cut through red tape, the Government could create one-stop shops at the regional level, possibly through earmarked grant programs, and ensure adequate formal channels for SME advocacy in the policy-making process. 2.69 Government programs aimed at raising skills of entrepreneurs are of variable, often low quality. Private sector service providers, on the other hand, are often 45 undermined by public services that are below par. To rectify this, the Government needs to develop plans to eliminate, privatize or restructure SME programs that do not meet appropriate performance criteria. Except in selected cases, the Government should move away from providing business support services, and instead encourage public-private partnerships and private business centers. 2.70 Banks lend little to SMEs because it is costly and risky. To overcome this constraint would require: * a credit bureau and credit registries run by the private sector, that can improve access to information and reduce the risk of lending to SMEs; * incentives for banks to invest in staff training and procedures for SMIE lending; * supervision and support mechanisms within the Ministry of Finance to assist small financial institutions that lend to micro enterprises (such as BPRs, deposit-taking NGOs, Credit Unions); * programs to strengthen financial institutions lending to small businesses. 2.71 Corporate governance. Not only is good governance crucial for investor confidence, it also helps develop a more stable and efficient private sector. In 1999, the Government established the National Committee on Corporate Governance (NCCG) to: create a Code for Good Corporate Governance that sets a benchmark for corporate practice; suggest legal reforms to implement the Code; and establish an institutional structure to support the Code. Members of the NCCG were appointed by the GOI and drawn from Govemment, the academic world and the professions. 2.72 By early 2000 a draft Code of Good Corporate Governance had been prepared, and has subsequently been revised in line with comments from the business community. The National Committee is now focusing on its dissemination. Institutions and groups in the academic and business communities have focused on various aspects of corporate governance, including through public seminars. BAPEPAM, the capital markets regulator, has shown some resolve in tackling enforcement issues. Private consulting companies are reporting an increase in the level of business from private clients wishing to upgrade their corporate govemance practices. 2.73 The Govemment is considering a Review of Standards and Codes (ROSC) in corporate governance, possibly in FY01/02. Plans are also afoot to upgrade the listing rules of the Jakarta Stock Exchange and to examine the feasibility of demutualizing the Exchange in the medium term. Future initiatives need to include continuing efforts to strengthen institutions, to foster networking between institutions within Indonesia and also internationally, to increase public awareness, to train practitioners and to promote implementation at the corporate level. 2.74 Competition Policy. In June 2000, GOI appointed 11 commissioners to run the Commission for Business Competition ("KPPU"), a new independent regulatory agency in charge of implementing and enforcing Law No. 5/1999 on competition. The 46 Commission's effectiveness will depend upon its capacity to: (i) remain independent from business; (ii) address competition issues in a technical, transparent, non-intrusive and fair manner; and (iii) develop an effective advocacy strategy for public policy measures affecting competition. 2.75 There is still a gap between the objectives of the law and its application in reality. To narrow this gap, KPPU has prepared a program with the following objectives: p Broadening the scope of work The law requires KPPU to offer technical assessments and advise government agencies on policy and regulations affecting competition in markets. To achieve this, KPPU needs to develop a framework and methodology to understand and approach the interactions between competition law and economic regulation, SOE privatization, SM development, improved corporate governance, and regional decentralization. The outcome will enable KPPU to have a more comprehensive vision of its role in shaping policy-making and facilitating reforms. > Training government officials on the Competition Law. Efforts here would focus on: (i) strengthening regulatory, analytical and enforcement capabilities at KPPU to address firm/consumer complaints and requests for policy advice, (ii) initiating a dialogue with regional and local governments on the implications of the law; and (iii) training judges on enforcement and compliance with the competition law. #> Dissemination of KPPU's objectives and policy principles. Dissemination would focus on the preparation and publication of reports, booklets and brochures containing general information about the competition law and KPPU and would be aimed at government bodies, business communities and public at-large. Conclusion 2.76 Progress on structural reforms has been slower than expected. While there has been forward movement in some areas (bank recapitalization, corporate debt restructuring, Pertamina's procurement systems), progress on the overall program has been significantly behind the Government's own timetable. Of greatest concern is the need for stronger strategic leadership in a range of areas - privatization, agricultural policies, energy and mining policies, and SME development. There is a critical need for a game plan to tackle the large structural issues that remain unresolved - including state ownership of large swathes of the banking system and corporate sector; inefficient, state- owned, loss-making sugar mills on Java; continuing large losses in PLN and the looming shortage of power generation capacity; long-term food security, including rice policy and the role of BULOG; burdensome fuel subsidies; inefficiencies and corruption stemming from Pertamina's monopoly over all aspects of the petroleum sector; and slow progress on competition law and corporate governance. Progress in these areas will be critical for increased investor confidence and greater efficiency in the allocation of Indonesia's increasingly scarce resources. 47 3. IMPROVING GOVERNANCE AND ANTI-CORRUPTION 3.1 The first chapter dealt with the importance of macroeconomic stability - an essential prerequisite for growth. The second focused on structural reforms to encourage the efficient use of resources - especially important given Indonesia's unusually constrained economic circumstances. This chapter addresses a third important element in Indonesia's economic agenda - namely the institutional and governance underpinnings that are needed to ensure sustained growth, even in a difficult world economic setting. It, therefore, pays special attention to such issues as the fight against corruption, better public financial management and procurement systems, reforming the legal and judicial system, effective management of the decentralization program, civil service reforms, and improved corporate governance. It also looks at how these issues affect the natural resources sector, mainly forestry and water. 3.2 Indonesia is already paying a high price for poor governance: * The heaviest price is paid by the poor, whose ability to access essential services needed to build their human capital to climb out of poverty is compromised each day by a heavy handed and corrupt bureaucracy. A recent study shows that the poor see corruption and lack of transparency as financially costly, corrosive of morality and social capital and eroding their human capital by reducing their access to social services (Box 3.1). * Investors are frightened away by the inability of the justice system to enforce contracts and by the increased level of violence and frequency of break downs in law and order. Recent court decisions and police investigations, particularly those relating to Manulife and Panca (Box 2.1), are reminders of the vulnerability of investors to a dysfunctional justice system. * Scarce government resources are being lost through a flawed procurement and financial management system and through blatant disregard of public property. If a modest savings of 10 percent could be realized in public procurement in the development budget, it would yield the exchequer some $500 million. The amounts would be significantly larger if off-budget public investments were included. The reported loss of papers relating to the BLBI cases by the Attorney General's office, for instance, could conceivably result in very large losses to the public exchequer. 3.3 By their very nature, governance reforms will take years to implement and take root. Yet action is needed now to develop and begin implementing these long term strategies, without which investor confidence will prove difficult to restore and sustainable poverty reduction will prove elusive. Moreover, there are potentially a number of 'quick wins" that could significantly shift incentives and build momentum for these reforms. 48 Box 3.1 Corruption and the Poor On the morning of June 29, 2001 Ibu Fitri hurriedly cleaned her small row house in Pulogadung, Jakarta, fed her youngest child, and then carried him to look for a minibus. That day was report card day for Sari, her eldest child, who went to elementary school in Pulogadung. Before handing out the report card, the teacher told Ibu Fitri that the parent of a student had just passed away, and that other parents should contribute some money for the good cause. She told Ibu Fitri that she would only give out Sari's report card after she paid up some condolence money. According to the teacher, other parents had given Rp. 15.000 - Rp. 20.000, but not less than Rp. 10.000. Ibu Fitri felt her heart beating faster. This expense would mean her children would be short of food. Her husband barely earned enough to keep the family going. Ibu Fitri went to the headmaster for confirmation of the teacher's story. Since he could see she was visibly angry, the head master admitted that no one had died, and this was a ruse to get parents to pay. However, the headmaster refused to exempt her from making the contribution. He said that he had no authority over the case, and that Ibu Fitri had to deal directly with the teacher. Ibu Fitri could not understand how a head master had no authority over a teacher. She wondered if the head master was getting a cut. But she understood now that she had no choice. With a lot of resentment, she gave the teacher Rp. 10.000, saying that she could not give more since her husband had not received his salary yet. With a sour face, the teacher snatched the money off Ibu Fitri 's hand. When Ibu Fitri asked for a receipt, she kept saying angrily, "later, later". The teacher kept showing her animosity and would not pay any attention to Ibu Fitri. Since her youngest kid started crying, Ibu Fitri had no choice except to give the teacher another Rp. 5.000 for "pencil money". Only then did the teacher smile and hand her Sari's report card, a smile that made Ibu Fitri feel even more angry and frustrated. When she got home Ibu Fitri shared her anger and frustration with her neighbors. What she could not share was the burden of replenishing the Rp. 15.000 that she had used to pay the ransom for Sari's report card. It was supposed to be a happy day for Ibu Fitri because Sari passed herfirst grade. But it turned out to be a day offrustration - The Poor Speak Up Each day in Indonesia, thousands of similar drama are enacted. Another poor person faces humiliation and anger as they face the cost of corruption and lack of transparency. They suffer from corruption in dealing with the police, at school, the electricity company, local aid projects, in obtaining ID cards, credit, etc. Speaking up for themselves, the poor see four major costs of corruption: financial costs - corruption eats into already tight budgets; moral decay - they see corruption eroding the rule of law and reinforcing a "culture of corruption"; loss of social capital - corruption destroys trust and damages relationships, corroding community cohesion; and human capital - corruption reduces access to and effectiveness of social services and thus erodes the human capital of poor people. When asked why they think corruption persists, the poor blame low salaries, lack of morality, lack of transparency and information, weak management and fear of repression: > "Officials have a poor attitude and lack morals, and everyone is used to bribing to the extent that it has become a culture". > "The reasons and rules are not clear. We have never seen a circular letter explaining the Jakarta Capital City garbage retribution. We do not know much about the officer who is collecting the fees or his office of origin" > "The 'building fee' has become a frequently used term. Every time a new child enters that school they have to pay although they do not construct any new buildings" > "I do not speak up because I am afraid that next time around, when rice is delivered to my village, I will be excludedfrom the allocation". Source: Corruption and the Poor, a joint initiative by the World Bank and the Partnership for Governance Reform in Indonesia, October 2001. 49 Corruption 3.4 Corruption is the most well known symptom of poor governance in Indonesia, and the one that is most detested by investors and the Indonesian public alike. International surveys of foreign investors show Indonesia as among the most corrupt countries in the world. The Indonesian public seems to share this judgment. A recently released survey by the Partnership for Governance Reforms in Indonesia' shows that Indonesian households, enterprises and civil servants all concur that corruption is one of the most severe problems facing Indonesia. Some key findings: * Corruption in the public sector is regarded as very common by approximately 75 percent of all respondents, with 65 percent of households reporting actually experiencing corruption. * The traffic police, the customs authority and the judiciary were ranked the three most corrupt institutions in Indonesia, while the media, the post office, and religious organizations were ranked the least corrupt. Ironically, those ranked the least honest or most corrupt were also perceived to be the least efficient in terms of service delivery. * Corruption extracts a high cost from society, with between 1 and 5 percent of household income, official salary, or company revenue spent on unofficial payments. Unsurprisingly companies that paid more by way of bribes for procurement contracts did more business with the government than companies that paid less. * Some 35 percent of companies surveyed said they were not investing in Indonesia because corruption related costs were too high. More than half the business enterprises surveyed (56 percent) were willing to pay more than 5 percent of company revenues if corruption could be eliminated. * While public attitudes to corruption appear to be highly negative with 70 percent of respondents regarding corruption as a serious social problem, roughly a third of respondents when asked about hypothetical situations relating to their own values and behavior saw corruption as something normal and paid bribes. But they drew distinctions between bribing for a national identity card (KTP) which was seen as normal, and bribing a judge which was not seen as normal. The lower the rank of the civil servant receiving the bribe, the less the act of bribing was seen as wrong. * A vigorous debate is now underway throughout the archipelago on how to control corruption. The Partnership for Governance Reforms is facilitating this debate and has launched workshops to disseminate diagnostic work and help 'A Diagnostic Study of Corruption in Indonesia, Final Report, October 2001. Partnership for Governance Reform in Indonesia. The study is based on a survey of 2,300 respondents consisting of 1,250 households, 650 public officials, and 400 business enterprises carried out in early 2001. 50 build consensus around a national anti-corruption strategy. It needs to engage government and Parliament more closely in this debate and to encourage some quick wins even as the more complex task of building consensus gets underway. 3.5 Corruption corrodes public trust in government and distorts incentives. There are four key elements that would be part of a national strategy. The first is to reduce opportunities for corruption. The second is to repair broken accountability systems, through strengthening public financial management and procurement systems. The third is to strengthen the legal framework for anti-corruption. The fourth is to deter corruption through better enforcement of the law. In the medium to long term the establishment of a more accountable, efficient civil service will help bring about a reduction in corruption and a well executed decentralization program will make governments more accountable to the people. These issues are addressed below as part of the key set of actions needed to strengthen institutions and improve governance in Indonesia. Reducing opportunities for corruption 3.6 Much of the public anger against corruption in the Soeharto era came from what has come to be known as "policy corruption": the unscrupulous use of public policies to skew rewards towards a chosen few. The newly democratic Indonesia is already building many checks and balances that prevent such an abuse of power for private gain. Parliament in particular has been exercising its oversight functions with vigor. The media has been active in exposing corruption in public life, including in Parliament. Fit and proper tests are being administered to high officials. Reducing opportunities for corruption, however, calls for action on a few key fronts. • Policy formulation: The government needs to establish a clear process for policy formulation that leads to a disciplined, stable, transparent and structured policy- making process. Important government policies and decisions need to be subject to review by all the relevant agencies and departments prior to consideration by the Cabinet and the President. Where appropriate, i.e., in the case of decisions that have large consequences for the budget or the economy, they need to be subjected to public hearings and prior parliamentary review through white papers or other mechanisms. Careful recording of decisions and the monitoring of their implementation needs to be ensured. This is often not the case today, and opens the way for policy decisions and laws that have not been subjected to the kind of scrutiny necessary both to avoid misuse of power and obtain stakeholder buy-in, which in turn should maximize the prospects that such policies and laws attain their objectives. * Enhanced transparency: The government needs to develop a strategy to greatly enhance public access to information. A freedom of information law is under consideration and needs to be expedited. In the meantime, much could be done to make widely available all government laws and regulations and to actively publicize administered prices and government procurement tenders and outcomes. * Allowing choice and voice: Government departments need to eliminate public monopolies where appropriate or ensure that consumers have a choice. And where 51 not appropriate, as for example with natural monopolies like water, ensure the voice of consumers is heard and acted upon. Reversing the huge accretions to public ownership that were an inadvertent consequence of the financial crisis will also help greatly reduce opportunities for corruption. (see Chapter 2). Rapid progress in privatization, through an open and transparent process, is critical not just to the macro-economic reform agenda, but to the corruption agenda as well. Improving the legal and regulatory framework: All laws, regulations, procedures and controls need to be reviewed to reduce the discretionary powers of the bureaucracy and to increase efficiency in public service delivery. This is where the state interacts daily with citizens and corruption has become the norm. With decentralization, this will become an even bigger challenge. 3.7 Next steps: These are long term measures, but as with all governance issues, lack a champion who will shepherd and push this agenda. An inter-ministerial committee under a senior minister needs to take this and other elements of the anti-corruption agenda and hammer out a program of actions that can then be implemented over time. Public rinancial management and procurement systems 3.8 Strengthening fiduciary standards has become a high priority for Government - for four reasons. First, the public is demanding it, and understandably so. Indonesia's move to greater democracy and transparency must begin with better management of public finances. Second, donors and creditors are demanding it. Stung by revelations of "leakage" of public resources, donor and creditor agencies are concerned their aid is used for the purposes intended and reaches ultimate beneficiaries. Third, shrinking budgetary resources and rising public expenditure needs makes it imperative to use public resources wisely, prudently, and transparently. And fourth, fiscal decentralization has added a layer of complexity that demands installation of new and improved systems. 3.9 While reform of public financial management and procurement systems will take many years, there are two actions that need immediate attention: * creating a legal framework to anchor future reforms in public financial management; * creating the right organizational structure to guide the reform of Indonesia's public procurement system. 3.10 Public financial management: New draft state finance, treasury and audit laws are under consideration. These offer an unprecedented opportunity to set new rules for modern, effective management of public finances. But the current drafts of these laws could benefit greatly from revisions through a process that involves major stakeholders, including Parliament, the Ministry of Finance, and the Supreme Audit Board. International experience suggests that tinkering at the margin does not work: something more fundamental is needed. 3.11 Revisions to the draft laws should be guided by four key principles, namely: accountability for results to Parliament and the people, full transparency in all 52 government transactions, empowerment of professional managers, and oversight by a principal expert auditor. These principles suggest that the drafts need improvements in the following areas: * Clear definition of the role and responsibilities of key players in the budget process, and better definition of the budget process itself, to ensure best possible use of government money, while safeguarding macroeconomic stability. * Enhanced budget documentation and reporting requirements for Government so Parliament can fulfill its oversight role, and focus not just on inputs, but also on outputs and outcomes. * Strengthening the role of the Ministry of Finance in the budget process and budget implementation as manager of the Government's money and accounts. In exchange, the Ministry of Finance should be made more accountable to Parliament through regular, scheduled reporting. * Reinforcing both the position of the Supreme Audit Board (BPK) as the sole external auditor of all central government finance and its independence through tenure of its members and financing arrangements. Ensuring BPK's right to audit all state finances, providing a clear relationship between BPK and Parliament, and ensuring that BPK has unrestricted access to information. 3.12 The Minister of Finance established a high-level Committee in April 2001, to guide reforms of the financial management system, and it has been engaged in discussions with Parliament on the draft laws ever since. An agreement is now needed with Parliament on broad principles for a modem public financial management system for Indonesia and for the laws along the lines suggested above. 3.13 Next steps could include the appointment of a drafting committee with members representing Parliament, the Supreme Audit Board, and the Ministry of Finance, to finalize the laws according to agreed principles. The broad principles for reform and a strategy for a time-bound action program for the preparation of laws by the drafting committee of reforms could be adopted and made public, by a set date, in a "White Paper". But for this to happen, government needs to appoint a senior official as champion to steer these reforms forward and be held accountable for results. 3.14 Procurement reforms: The World Bank's Country Procurement Assessment Report2 analyzed the procurement system in Indonesia and found it to be deeply flawed. Following discussions on the report, the Government established an interdepartmental Steering Committee and a Working Group in late 2000 to guide procurement reforms - beginning with the adoption and publication of an action plan to reform the legal framework and organization structure for procurement. The Working Group has been reviewing existing procurement regulations, and carrying out preparatory work for the establishment of a National Public Procurement Office (NPPO), and for building 2 The World Bank, March 27, 2001. Indonesia: Country Procurement Assessment Report. 53 procurement capacity in all government agencies. But progress toward preparation and adoption of an action plan has been slow. 3.15 If the current hemorrhaging of public funds due to poor procurement practices is to be stopped, and if Indonesia's procurement systems are to be brought up to international standards to meet AFTA and WTO requirements, it is essential to appoint a full time senior official immediately to lead procurement reform (with a strong determination to rid public procurement of corrupt and collusive practices). This senior official needs to prepare, within a set timetable: (i) principles for reform of the organizational structure including the establishment of the NPPO and a legal framework for procurement, (ii) a set of reform options for a high-level decision on the preferred option, and (iii) a draft action plan for implementation of the agreed option within a specified timeframe, and (iv) measures to ensure uniform procurement standards apply throughout Indonesia. The legal framework 3.16 The legal framework for anti-corruption is reasonably robust with recent changes made in the anti-corruption law. The law will establish an Anti-Corruption Commission with powers to investigate and prosecute corruption cases. While experience in other countries shows a mixed record for such commissions, the current state of the Indonesian judiciary suggests that this may be the only way to impart momentum to the enforcement of anti-corruption laws. But this will only work if commissioners are carefully chosen for their integrity and ability and if the 2002 budget adequately funds the Commission. One big lacuna in the legal framework, however, was highlighted by the decision of the Financial Action Task Force (FATF) in June 2001 to declare Indonesia a non-cooperating country on matters of money laundering and by the recent UN Security Council resolution calling on countries to act firmly against money laundering (Box 3.2). 3.17 Indonesia has therefore begun work on a law to eradicate money laundering. The present draft has many problems. These include the failure to cover non financial institutions, the need to ensure coverage of extra-territorial criminal acts relating to money laundering, vagueness in the provisions relating to the proposed Commission for the Eradication of Money Laundering Criminal Acts, and for the proposed center for Financial Transaction Reporting and Analysis, and inadequate coverage relating to assets to be frozen seized or confiscated. Legal and justice sector reforms 3.18 Reducing corruption, creating a positive investment climate and ensuring that the benefits of development reach the poor all depend on an effective justice sector. In the New Order period, Indonesia attained high rates of growth and poverty reduction despite the lack of a strong justice sector. This was possible in a network based autocracy. Indonesia's transition to a democracy is a transition away from a society governed by networks and personal connections to one based on rules. Democratic governments cannot guarantee investors the kind of stability that authoritarian regimes sometimes achieve unless they are able to establish the rule of law. The justice sector is at the heart 54 Box 3.2 Money Laundering in Indonesia: Implications of the FATF Report In June 2001, the Financial Action Task Force on Money Laundering (FATF) included Indonesia in its list of non-cooperative countries and territories. This will have important implications for the country, especially in light of increased world awareness of such issues after the September 11 events. What is the FATF? The FATF is a 29 member inter-governmental body, with its Secretariat at the OECD, tasked to help all financial centers adopt international standards to prevent, detect, and punish money laundering. The FATF prepared forty recommendations as the international standard for effective anti-money-laundering measures, covering the criminal justice system and law enforcement, the financial system and its regulation, and international cooperation. Non-cooperative countries and territories (NCCTs). In February 2000, the FATF published an initial report on non-cooperative countries and territories, setting out: (i) 25 criteria to identify practices and rules that impede international cooperation in the fight against money laundering; (ii) a process to identify countries with such practices and rules and encourage them to implement international standards in this area; and (iii) possible counter-measures that FATF members could use to protect their economies against the proceeds of crime. In June 2000, the FATF published its first set of NCCTs, containing 15 countries, and updated this list in June 2001. Indonesia is now on the list. Indonesia meets 9 out of the 25 NCCT criteria, and partially meets 4 other criteria. It lacks a basic set of anti-money laundering provisions. Money laundering is presently not a criminal offense in Indonesia. There is no mandatory system of reporting suspicious transactions to a Financial Intelligence Unit. Customer identification regulations have been recently introduced, but only apply to banks and not to non-bank financial institutions. In order to rectify those deficiencies, the Government has drafted a law concerning Eradication of Money Laundering Criminal Acts. The draft is being discussed in Parliament. Implications for ATCCTs. The FATF members request their financial institutions to give special attention to businesses and transactions with entities in countries identified as non-cooperative. This increases the cost of doing business. If a country does not make adequate progress, further counter-measures and sanctions are implemented. This could include a rigid examination of all incoming and outgoing financial transactions between banks and their foreign counterparts. It could lead to time-consuming and costly verification of transactions. Moreover, sanctions can increase the price of exports to FATF member countries to incorporate the cost of coping with stringent bank requirements. Foreign banks would also be more stringent with applications for letters of credit, further increasing the price of export products. In the Philippines, for example, government officials estimated that the counter-measures could cost $7 million a day in delayed transactions and greater scrutiny. To get off the list, a country must satisfy the FATF that it has addressed the deficiencies identified. Particular importance is given to the relevant aspects of criminal law, financial supervision, customer identification, suspicious transactions reporting and international cooperation. Any new legislation or regulations must not only have been enacted but also have come into effect. Furthermore, the FATF takes steps to ensure that the jurisdictions concerned are indeed implementing the necessary changes effectively. Indonesia's case will be reviewed in June 2002. 55 of Indonesia's governance reform efforts because it is the sector where rules are laid down and enforced. 3.19 The critically weak and almost dysfunctional condition of the justice sector in Indonesia - the judiciary, the bureaucracy responsible for many aspects of the machinery of the legal and judicial system, the Attorney General's Office, the police - is one of the most fundamental impediments to both economic recovery and sustainable long-term development in the country. As the recent diagnostic survey on anti-corruption revealed public confidence in the sector is low (Box 3.3). Investor confidence is even lower (Figure 3.1). Indonesia rates particularly low on the court system's reputation for honesty and corruption. Box 3.3 Perceptions of corruption in the legal system The Indonesian judiciary, police, and prosecutor are seen as among the most corrupt in the country. Judges and prosecutors, according to a recent diagnostic study of corruption in Indonesia,' were "consistently ranked among the least honest, just above the traffic police and customs". Of households and businesses which had recent experiences with the justice system, roughly a third paid bribes to judges. Two-thirds of households who did so paid bribes to prosecutors and three-fifths to staff in the prosecutor's office. Businesses paid between Rp. 1-5 million while households paid an average Rp. I million to courts, with 11 percent of households and 20 percent of businesses paying more than Rp. 5 million. Households generally do not use the court system to resolve disputes, but businesses were more likely to do so. Asked to list obstacles to using the courts, key reasons given were that judges would make unfair decisions, that it would take too long, that unofficial costs were too high, that court decisions would not be enforced and that judges were incompetent. These reasons tally with the views of foreign investors in Figure 3.1. 3.20 There have been a number of initiatives in the past three years to tackle weaknesses in the justice sector. First, an effort was made (perhaps prematurely) to free the courts of interference from the executive and the legislative branches of government, by giving courts autonomy, raising the salaries of judges and conducting fit and proper tests for vacancies arising on the Supreme Court. Second, to deal with bankruptcy cases, a commercial court was established outside the traditional court structure. The Supreme Court was persuaded to appoint ad hoc judges to this court, and to require that this court publish its judgments. Third, a concerted effort was made to establish a legal infrastructure to fight corruption through a new anti-corruption law which also required the establishment of an Anti Corruption Commission by August 2001 (see above). Further efforts included the appointment of an Ombudsman, the establishment of a standing Committee for the Audit of Assets of State Officials, the creation of a Joint Investigating Team under the Attorney General's Office to pursue allegations of corruption against the judiciary and the commissioning of a governance audit of the Attorney General's Office. Finally, recognizing the ad hoc nature of many of these 56 Figure 3.1 Business Perceptions of the Legal System Indonesia's legal system is seen as highly L%. .honest par/lia!. Most unfair Least honest Argentina Indonesia Indonesia Ukraine Russia Russia Ukraine Argentina Mexico u Mexico Brazil _Bangladesh Bangladesh ~~~~~~~~~~~~~~~~~~APhilippintes Nigeria Average Brazil us Nigeria Ghana IndiaAerg philipp ines Turky Averagey Turkey Ghana Pakilstan US UK Chia India Malaysia Malaysia Thailand China UK Thailand South Africa South Afnica _ n. Egypt Most onest Egypt Least unfair Singapore Singapore ........ naaffordable ........... andsomewzhatislow. Least affordable Slowest Brazil Bargnngads l vt Argentina Bgade UK Brazil US India Indonesia ~~~~~~~~~~~~Nigeria Indi Turkey Philipp es Indonesi Bang ~~~~~~~~~~~~~~~~~Russia Ban Phppis Average 3 Ukraine rNige Average Mexico South Afic Russia South Afnc Thatland UK Malaysia US Turkey Thailanc~ Mexico Ghana Ghana Malaysia Ukraine Pakistan China China Egypt S ingapore Quickest o 1 42 5 5 S Court daecisions are not enforced ...... .... and there is not much confidence in t/he system Least -nforced Russia Least confidence Indonesia Ukraine Russia Bangladesh Bene A Nigena Phil'5 Aggitira Pletioie Indonesiat Arentin U K Bsail Average G han Average US Pakistan UK Turkey Taileria o 5 sh Africa Malaysi L Phip ne Ghana ! -China auth Afti ~~~~~~~~~~~~~~~~~~~India Cinno AfttaMost enforced TMhland Most confidence Singupor Singapore Source: World Business Environment Survey. Note: Score ranges from I to 6. The higher the score, the worse-off the country is. The survey covered 81 countries. 57 initiatives, President Wahid appointed a National Law Commission to develop a coherent plan of action for reform of the sector. 3.21 But few positive results have come from these efforts at reform: * Despite the appointment of several new justices to the Supreme Court, including the Chief Justice, through a fit and proper test administered by Parliament in full public view, recent judgments demonstrate that the pattern of questionable judgments persists. Moreover, when the Joint Investigating Team in the Attorney General's Office tried to prosecute judges on the Supreme Court for corruption, the Court promptly declared invalid the regulation establishing the Team - and thus revealed its unwillingness to reform itself. Meanwhile, surveys and anecdotal evidence also confirn continuing widespread public skepticism about the honesty and impartiality of the judiciary. * The Commercial Court, through a number of questionable judgments, has not gained the confidence of the investor community either, and consequently has not played a significant role in corporate restructuring, which in turn has progressed slowly, sporadically and unsatisfactorily (see Chapter 2). * The Anti Corruption Commission has yet to be established. Other institutions established to fight corruption lack adequate funding and political support. The Committee for the Audit of Assets of State Officials is struggling to get itself underway and even more to ensure that there is effective compliance with its mandate. No formal follow-up to the findings of the governance audit of the Attorney General's Office appears to have taken place. * The National Law Commission does not appear to have been able to stake out a major role in policy-making circles. Like most other commissions, it has not been given a budget, and it appears to have no client in Government to whom it is accountable or to whom it can direct its recommendations, even though it is formally charged with advising the President. 3.21 To some extent it is understandable that the steps taken to date show few demonstrable results: institutional reform is a long-term process and typically takes years. And some measures taken may appear modest but are likely to have far-reaching impact: the publication of commercial court decisions, for example, has not only been valuable in evaluating the competence and integrity of that court, but also is likely to trigger similar changes in the rest of the judiciary. Slow progress to some extent also reflects lack of political consensus on how to deal with the past. Very few corruption cases of any significance have been prosecuted and, of those that were, many got dismissed on technicalities. An agreed approach to how to address the past with a view to reducing the burden on the system will be an important precondition. But the main factor underlying this limited success is the apparent lack of political commitment to manage and coordinate what are extremely complex long-term reform goals. 58 3.22 For meaningful reform to occur, the Government of Indonesia should seriously consider making comprehensive justice sector reform an explicit national policy priority with a commensurate allocation of political attention and resources. To that end, the Government should adopt a time-bound framework for justice reform consisting of measures and initiatives, determined to the maximum extent practicable based on a participatory process with relevant stakeholders including the National Law Commission. International experience suggests that the framework and resulting reform program should: * Address all aspects of reform of the various institutions of the justice sector -- the police, the Attorney General's Office, the judiciary, the prison system, and the relationships among them. * Articulate a vision of the proper role and responsibilities of these institutions, a basic policy statement for each such institution, and the reform objectives to be attained through the reform program. This should be based on the adoption of a vision statement for each institution that takes account of, and follows, a- broad-based process of consultation with stakeholders and of a quick governance audit. * Require the police, the Attorney General's Office, the judiciary, and the prison system to provide, within say 4 months, a strategy and implementation program for reforming themselves in line with the Government's vision statement. Each such program should be evaluated in light of the independent audit findings and recommendations and be subjected to a structured process of public scrutiny and debate. Final programs for reform should be adopted by the Government and endorsed by the DPR within 6 months of the targeted completion date for the presentation of the in-house program. * Provide for monitoring of the program against the objectives and targets of the time- bound action plan and for regular reporting of program status and achievements, with an emphasis on transparency. 3.23 Given the lack of credibility of the justice sector in Indonesia, any program of reform for the sector is likely to be greeted with profound skepticism. For this reason, the Government of Indonesia should further consider taking a number of short-term measures that are within its control to demonstrate its intent and resolve. The following illustrative steps could contribute powerfully to establishing such credibility: * A public deadline could be established (by law if necessary) for all state officials to register statements of wealth and sources of such wealth with the State Commission for Auditing the Wealth of State Officials. Failure to register would result in immediate suspension. Failure to adequately explain the sources of their wealth should at least lead to loss of public office. * All members of the Supreme Court and Courts of Appeal who have not taken a fit- and-proper test in the last 3 years could be required to do so. Failure to submit to, or 59 pass such a test should result in immediate and permanent suspension or dismissal from service. * The law could be amended to require the Supreme Court and Courts of Appeal to follow the Commercial Court practice and publish reasoned judgments within a specified period of a decision. Moreover, judgments by these courts and by the Commercial Courts should be reviewed and this review should be used to establish legal benchmarks. Promotions and postings should be based on such reviews. Decentralization 3.24 The "Big Bang" decentralization on January 1, 2001 started better than most observers had expected, especially as several key safeguards were only put in place at the last minute. With the exception of teacher strikes on the issue of back-pay increases, the first 9 months of the program have been without major incident. The crucial transfer of 2.1 million civil servants is largely completed, the general allocation grant (DAU) to regions is being distributed, and disbursements of shared revenues began in July. But reports on predatory regional taxes are on the increase, whereas the center's supervision does not yet seem to work smoothly. Some key regulations are still outstanding. Moreover, the regulatory framework shows several weaknesses - in part signs of the haste with which it was put together, but in part because some of the regulations seem to contravene the laws. And within a year of implementing Law 22, Government has now decided to revise it, causing significant uncertainty at the regional level. 3.25 Regulatory framework. In the days just preceding January 1, 2001, the Government issued many regulations supporting implementation of Decentralization Laws 22 and 25/99 - and this was followed by another spate of regulations in early 2001 (Table 3.2). In the process, there are several regulatory issues that have arisen, including: * The far-reaching regulatory powers of the regions may interfere with the free flow of goods, services, and capital within Indonesia, with potentially damaging consequences for the economy. * Part of Presidential Decree 62/2001 on the functions of the central bureaus seems to contradict Law 22-by granting the land agency BPN continued right to manage land affairs-a function which is among the obligatory functions of the regions. * MPR decree IV of August 2000 - calls for a revision of Laws 22 and 25, and yet allows regions to issue any bylaw on matters of decentralization not yet regulated by the center. While the decentralization laws are far from perfect, a major revision now may disrupt the decentralization process just embarked upon. * Two laws on special autonomy for Aceh and Papua have been passed (Box 3.4) - which grant these two provinces additional resources - beyond that provided by existing law. 60 Table 3.1: Laws and regulations on decentralization issued in 2001 Laws WU No. 18/2001 Distinctive Autonomy for Special Regional Province of Aceh as the Province of Nanggroe Aceh Darussalam Government regulations PP No. 56/2001 Concerning the Reporting on Regional Government Implementation PP No. 52/2001 Implementation of Provision of Assistance Function PP No. 39/2001 Implementation of De-concentration PP No. 20/2001 Concerning the Management & Supervision of Regional Government Implementation PP No. 11/2001 Concerning Regional Finance Information PP No. 2/2001 Concerning the Protection and Transfer of the State Owned Goods/Properties from Central Government to Regional Government in the process of Regional Autonomy Implementation PP No. 1/2001 Concerning the Guidelines of Compiling Regional House of Representative Regulations Presidential decrees Keppres No. 74/2001 Concerning Supervision Management of Regional Government Execution Keppres No. 62/2001 The Amendment of Keppres No. 166/2000 concerning the Position, Duty, Function, Authority, Organization Structure, and Working Procedure of Non Department Government Agency that has been changed several times with last change by Keppres No. 42 /2001 Keppres No. 42/ 2001 Amendment of Keppres No. 166/2000 concerning the Position, Duty, Function, Authority, Organization Structure, and Working Procedure of Non Department Government Agency that has been changed several times with last change by Keppres No. 16 /2001 Keppres No. 39/2001 Utilizing of Contingency Fund for Assistances in Personnel Transfer, Equipments, Payments and Documents (P3D) to Regional Government Keppres No. 17/2001 Amendment of Keppres No. 178/2000 concerning the Organization Structure & Function of Non Department Government Agency Keppres No. 16/2001 Amendment of Keppres No. 166/2000 concerning the Position, Duty, Function, Authority, Organization Structure, and Working Procedure of Non Department Government Agency that has been changed several times with last change by Keppres No. 173/2001 Keppres No. 6/2001 Concerning Determination of Numbers & Procedures in filling up membership of Regional House Representative in New Provinces and Regencies/Cities after the Election year 1999 Keppres No. 5/2001 The Implementation of Regency/City Authorities Source: http://www. gtzsfdm.or.id/ 61 Box 3.4 Special autonomy for Aceh and Papua Law 18/2001 (approved on August 9, 2001) and the draft Law on Papua provide for special autonomy of Aceh and Papua. Existing laws require the center to share with all regions 80 percent of revenues arising in the region from general mining, forestry and fishery, 15 percent from petroleum, and 30 percent from gas. The Special Autonomy Law for Aceh gives more -- 55 percent of revenues from petroleum and 40 percent from gas.4 These arrangements for Aceh will cost the center Rp.1.5 trillion, which is equivalent to Rp. 375,000 for each Acehnese. The draft Special Autonomy Law on Papua gives the Papuans 70 percent from oil and gas. The draft Special Autonomy Law for Papua will cost the center an additional Rp. 1.52 trillion - about Rp. 700,000 for each Papuan. As the Government's statement suggests, the center's development budget (Rp. 52.3 trillion) may also serve as a further channel for resource transfers to the region. 3.26 Transfer of units and civil servants. By end-September 2001, the transfer of civil servants, facilities, and archives was largely completed. In total, 239 provincial level offices of the central government, 3,933 district/city level offices, and over 16,000 implementing units were handed over to the provinces, districts, and cities3. With these offices, some 2.1 million civil servants were also transferred-200,000 less than originally assumed. 3.27 Given limited funding at the provincial level and the large number of civil servants that remained at that level, the provinces found their budgets squeezed. The situation worsened when all civil servants were granted a wage hike, which came on top of wage increases for regional civil servants arising from an upgrading in their functions. The contingency fund for decentralization brought some relief-disbursements totaled Rp. 3 trillion- but this is likely to be temporary. 3.28 Regional regulations. Perhaps motivated by the budgetary squeeze, many regions were eager to raise levies and taxes. Law 34/00 allows regions to do so, as long as they conform to principles listed in the law. The imposition of regional taxes has become a significant concern for investors, and some obvious abuses of Law 34 have been widely published. By August, 2001 MOHA received a total of 1060 regional regulations of which 809 have been approved and 84 were rejected; the remainder are pending review. The rejected regulations, however, have not been formally cancelled. Instead, the regions were requested by letter to reconsider them. 3.29 Safeguards. The Government put in place some key safeguards to hedge against the risks of decentralization, for example: 3 GTZ Decentralization News, March 2001. 4The arrangement appears to become less advantageous after eight years, i.e., 2009. 62 * It banned regions from new borrowing in 2000, except through the center. While government regulations set affordability limits to borrowing by individual regions, this would not have assured that aggregate regional borrowing was in line with macroeconomic requirements * In the 2001 budget, the Govemment also included the aforementioned contingency fund of Rp. 6 trillion, of which half was used by mid-September. The speed of decentralization made it virtually impossible to match decentralized expenditures with needed revenues, and despite transitional elements in the general grant allocation fornula, mismatches were inevitable. As discussed, the contingency came in handy, especially at the provincial level. * Central Govemment decided to continue to pay the civil service for a transitional period of 5 months, while deducting the wage bill from the general grant allocation to the regions. This assured a smoother transition of personnel than anticipated. 3.30 Beyond these short-term safeguards, attention must now shift to the longer term task of ensuring that local governments adopt fiduciary safeguards and strong anti- corruption measures. The short-term risks of an increase in corruption following decentralization are high, but these risks can be managed (Box 3.5). 3.31 Next steps. First, continued efforts should be made to make the general allocation grant (DAU) mechanism more equalizing across regions as well as predictable and transparent. Unfortunately, Parliament recently requested Government to revisit distribution of the Rp. 69 trillion general allocation grant to the regions so that no region would get less than last year. This makes the allocation less equalizing and moves it in the wrong direction. 3.32 Second, Government needs to clarify the process by which Law 22 will be revised, and what changes it plans to implement beyond the elimination of obvious flaws. The announced revision has created considerable uncertainty in the regions, and has given central ministries - reluctant to decentralize in the first place - an excuse to slow implementation. One way forward would be for the Government to submit a "White Paper" on decentralization to the MPR session in August, to present the Govemment's strategy in decentralization, and agree to revise the laws once sufficient experience with the current laws has been gained. 3.33 Third, Govemment could reinforce its review of regional regulations, and actually cancel some that conflict with national law. This would send a strong signal to investors and constituents that the center is prepared to challenge abuse of power in the regions. 3.34 Fourth, is to establish a more comprehensive monitoring system. Early detection of emerging issues in decentralization, and a quick response by the center, will be keys to the success of the program. 63 Box 3.5 Decentralization and corruption As Government decentralizes and moves closer to the people, the cost of monitoring politicians should decrease, and so should corruption. Information provided by the Central Government can be used by local pressure groups to influence local governments. Political parties may be more accountable to their constituents, and may be tempted also to associate themselves with successful projects and programs. Competition among regions may also lead to decreased corruption and improved service delivery In the short term, however, many fear that corruption will flourish in the regions due to their sudden increase in money, power, and resources, but without appropriate checks and balances. Ensuring that these checks and balances exist and, more importantly, that the right incentives are in place to prevent corruption, is a priority for reform. How to do this? Some clear lessons have emerged both from international experience and experience with projects in Indonesia. Insisting on transparency and involving communities in decisions about their own development tends to prevent corruption. The Kecamatan Development Program (KDP) - supported by a World Bank loan - emphasizes transparency and community empowerment. It also bypasses local government, transferring money directly to villages. Roads and bridges built under KDP are on average 30 percent cheaper than comparable items in other projects. This, arguably, is a strong indicator of lower corruption levels. Internal rates of return also appear to be consistently higher than standard projects and ex-post maintenance reviews (3-5 years) found maintenance substantially better than through normal public service delivery methods. Getting the incentives and accountabilities right is key to preventing corruption. In KDP's case, those who control the project are also its beneficiaries. They therefore have an interest in not seeing money disappear. How can one take this process from the Kecamatan to the Kabupaten? Attention will need to be paid to community consultation processes, exit and voice policies, auditing procedures and the role of matching grants. In particular, matching grants with budgetary contributions from the district and/or community would raise the local stake in projects and programs and increase local incentives to monitor projects closely - and may, in turn, encourage politicians to associate with these projects. 3.35 Fifth, the Government needs to finalize the regulatory framework quickly, especially for Special Allocation Grants (DAK) and for on-lending arrangements to the regions. The absence of such arrangements is holding back the timely preparation of projects for financing by the international creditor community. But finalizing on-lending arrangements could still take time as the Government needs to reach closure on a variety of issues, including terms and conditions, monitoring and accounting mechanisms, and institutional arrangements. In the meantime, to reduce uncertainty and motivate local government participation in project preparation, clear and unambiguous interim arrangements need to be announced and communicated. 3.36 Finally, the Government should complete and fund a program for capacity building in support of decentralization. This program - of benefit to the center and the regions - could signal the Central Government's seriousness in getting decentralization right and in working together with the regions for a successful outcome. 64 Civil service reforms 3.37 Aside from decentralization, there has been little progress on civil service reforms. Government should therefore return to its focus on preparing a civil service reform strategy to which it committed in September 2000. Such a strategy should include the size of the civil service, pay, extent of decentralization, measures to improve performance, and steps to fight corruption. Following this strategy, the revision of the Civil Service Law in line with the new decentralized environment will become necessary. 3.38 Decentralization first. The Government rightly focused on decentralization as a key challenge for the civil service. Decentralization required the reassignment of some 2.1 million civil servants on top of the 150,000 already decentralized last year, and just managing the issuance and countersigning of the transfer letters was a major achievement. But much remains to be done. Law 22/99 requires a fundamentally different way of managing the civil service - with much of the authority to hire and fire devolved to the regions. Although regulations indicate how the new system will work, much remains to be clarified - including authority over promotions, career management, training, and competency standards. 3.39 Decentralization is hardly the only challenge for the civil service. The Government officially wants to shrink the size of the civil service, but it is unclear how this can be achieved in a decentralized environment. Line ministries and regions are free to hire contract workers so long as they pay from their own resources. In addition, from a survey done among civil servants, it is clear that a lack of performance management and corruption are of greater concem than pay. In fact, recent research suggests that most civil servants' income is in line with their private sector comparators, given their age and education level. This finding sharply contrasts with surveys of the public who feel low pay is a main cause of corruption (Box 3.6). 3.40 Next Steps. After the transfer of civil servants, the Government should shift attention to some of the unresolved issues in decentralization, including potential overstaffing and wages. Government should also continue to watch closely whether regions are reluctant to accept central civil servants on their payroll. Some regions may consider providing incentives for civil servants to leave employment, in which case the Central Govemment could consider sharing the costs of retrenchment. Government should also consider whether continued central wage setting is appropriate for Indonesia, especially now that finances for the regions are no longer provided earmarked for wages. Over time, responsibility for civil service pensions will also need to be sorted out - until now it has been the Central Government that paid, but for future hires responsibility will shift to the regions. How this will be done, and how the pensions will be managed is key for future mobility of civil servants among the regions. 3.41 Finally, the Government needs to clarify how it intends to build a civil service that is professional, efficient, productive, transparent, and free of corruption, collusion and nepotism - as the MPR has instructed.5 The initial attempts to formulate a civil 5 MPR Broad Guidelines of State Policy 1999-2004, Chapter 3, B 7. 65 Box 3.6 Better managed institutions are less corrupt In a recent survey on corruption conducted by the Partnership for Governance Reform in Indonesia, low salaries were seen as the most important factor causing corruption, with morality and lack of controls being cited as other factors. However, regression analysis showed that public institutions had lower levels of corruption where: * budgets were perceived to be developed in close consultation with managers; * rules, personnel polices, and procurement guidelines were perceived to be formalized, well- specified and implemented; * budget decisions and personnel decisions were perceived to be clear, transparent, and effectively monitored; * management tried to eliminate corruption involving even small amounts of money; * merit and qualifications were considered more important in the treatment of staff than other non-objective criteria. The above findings point to organizational characteristics of public institutions as causes of corruption over individual employment aspects such as salary and performance. In particular, quality management practices in procurement, budget, and personnel processes backed by strong anti-corruption orientation, limited discretion, and the implementation of rules were found to be significantly related to lower levels of corruption in public institutions."' ' A Diagnostic Study of Corruption in Indonesia, Final Report, October 2001. Partnership for Governance Reform in Indonesia. service reform strategy which started last year came to a halt due to the frequent changes in leadership in the State Ministry for Administrative Reforms (MenPAN), and the lack of coordination amongst the Civil Service Agency (BKN), State Administrative (LAN), and Ministry of Home Affairs. Now is the time to revamp this civil service reform strategy. The Steering Committee which prepared the early draft could be in charge, if adequately supplemented with staff and resources. The strategy should include changes to the incentive system, size of the civil service, recruitment, performance management, remuneration, and probity. It should clarify responsibilities for managing, monitoring and reporting on the reforms, and set a clear timetable for implementation. To show its commitment, the Government should submit its strategy to Parliament for review and final approval. Only after a clear strategy has emerged would it make sense to revise Law 43/99. Governance and decentralization - the case of forestry 3.42 Performance in every sector is affected by the quality of governance - directly and indirectly - as well as by the forces of decentralization. This is particularly important in natural resource management because environmental degradation has effects that tend to spread far beyond regional boundaries, and because the capacity of local governments is especially weak in this area. 66 3.43 As in most other areas of governance, the laws and policy instruments for managing natural resources are mostly in place; what seems to be missing is the will to use them effectively. Nowhere is this more true than in the forestry sector where the larger crisis of governance has affected the environment - and development - with tragic consequences. 3.44 Forestry. In February 2000, the Government committed itself to reforms supporting sustainable management of forest resources. These included: urgent action to control illegal logging, update the forest inventory, maintain the (temporary) moratorium on natural forest conversion, and restructure the debt of only those wood processing firms with legal and sustainable supplies of logs; establish an Interdepartmental Committee on Forestry (IDCF); and start a new National Forest Program (NFP) in consultation with all stakeholders. Unfortunately, the Government made little progress on this agenda, the only exceptions being the establishment of the IDCF and 70 percent completion of the forest inventory. In November 2000, the Government prepared a remedial action plan to advance stalled forestry management reforms but this too stalled. 3.45 Since March 2001, however, there has been some forward movement in reforms - focused on illegal logging, forest fire management, and forest inventory and mapping - but too little, as yet, to have made any difference to Indonesia's forests, where conditions are worsening. * Among 14 recent cases of illegal logging, one suspect was a police district commander. He has been dismissed and is going to trial. Both Government and independent observers have confirmed a marked decrease in illegal logging in that district followed this enforcement action. * On April 12, the Government issued a decree temporarily banning cutting of ramin and requested the secretariat of the Convention on International Trade in Endangered Species (CITES) to identify ramin as a species temporarily banned for export from Indonesia. The CITES listing became effective in August but is not being effectively enforced, as evidenced by ramin from Indonesia being unloaded in Singapore. * Forest fire management in Indonesia has been hampered by the Government's failure to prosecute companies that have been implicated. There has been slow improvement in this area: five companies were eventually prosecuted in 1998, and the pace of enforcement has accelerated somewhat. There is also a private-sector initiative, the Haze Prevention Group, set up by three of the largest wood industry conglomerates to prevent and control forest fire. * A process is underway to evaluate and classify indebted wood-processing firms (128 firms, total debt Rp.21.8 trillion) in IBRA's portfolio. Work was underway to prepare and implement due diligence criteria and procedures. The intention was to take into account a company's forest management and regulatory compliance when restructuring its debt. This effort has stalled; meanwhile substantial amounts of forest industry debt are being restructured without adequate consideration of forest management implications. 67 * The results of the forest cover mapping conducted in 1999 were made publicly available on a website and in the course of 2000, the quality of the mapping was upgraded with new satellite imagery for about 60 percent of the forest estate. The results reveal that 30 percent of the production forest and 6 percent of the protection and conservation forest surveyed are no longer forested. * In October 2001, the Ministers of Industry and Trade and Forestry issued a joint decree putting in place a ban on export of logs and raw material for wood chips. The Bank, other donors and creditors and even the forest industry have pointed out that this needs to be accompanied by vast improvements in monitoring and enforcement and a crack-down on the corrupt practices that enable the present high level of illegal exports. * The moratorium on conversion of natural forest included among the February 2000 commitments has been observed by the Ministry of Forestry but has become a much more difficult goal to achieve since decentralization, which expanded the authority of provinces and districts to issue logging and conversion permits. 3.46 The moratorium on natural forest conversion is supposed to remain in effect until the inventory and mapping is complete and the new National Forest Program has been formulated. Once the forest inventory and mapping is completed and the forest boundary re-drawn, the Government could release deforested "forest" land to local governments and to individual and communal owners, with incentives and technical assistance to promote agro-forestry. This may help to reduce pressure for forest conversion. 3.47 One of the early activities of the IDCF should have been to develop the National Forest Program. Some activities toward the eventual formulation of the Program are underway, but the IDCF action needed - establishment of a multi-stakeholder working group to guide and review the process - is conspicuously absent. In fact, nearly all of the activities to date to improve forest management are being conducted solely by the Ministry of Forestry, despite the widespread agreement that much of the work needed, particularly as regards governance, is beyond the authority and capacity of any single agency. Conclusion 3.48 Institutional development for better governance will take years, if not decades. But in Indonesia, a start needs to be made immediately - especially in legal and judicial reforms, civil service reforms, public financial management, and forestry policy. Indonesia's international reputation for honest and efficient government is badly tarnished. Improving that reputation will take years of assiduous effort. So there is little time to lose. 68 4. TOWARD A STRATEGY FOR POVERTY REDUCTION 4.1 A recurring theme in this report has been the importance of stability and growth for poverty reduction. But stability and growth are not enough. While cross country analysis shows higher growth to be correlated with faster declines in poverty rates, countries with broadly similar growth rates have experienced very different poverty outcomes. Research into this question finds that poverty tends to fall faster in countries where all aspects of government activity - policies, programs, expenditures, institutional development - are geared toward poverty reduction. A narrow focus on paternalistic programs designed to "help" the poor tend to have little impact. Far more effective are efforts to change the policy, institutional, and regulatory environment that affects the poor - so they have avenues to participate in decisions that shape their lives and avail themselves of opportunities offered by growth. Poverty, after all is multidimensional in nature, so it will need a multidimensional approach to reduce it. 4.2 This chapter makes five points. First, at a minimum, government policies should not work against the poor, and preferably should work for the poor. Second, public investment in the poor - through health and education programs - is essential for poverty reduction not only because it raises productivity and incomes of the poor, but also generates external benefits for the rest of society. Third, new institutional arrangements, especially in a decentralizing Indonesia, should not disrupt the delivery of public services to the poor in the short term, and improve and sustain the quality and quantity of such services over time. Fourth, the poor need to be empowered to shape the policies and programs that affect their lives and ensure efficient and effective implementation of public service delivery. And fifth, given the multidimensional nature of poverty - and the need to mainstream "poverty concerns" in all government interventions - the Government should prepare a broad-based poverty strategy (after consultation with all stakeholders) incorporating all the above elements. Poverty trends 4.3 Economic recovery and macroeconomic stability have helped reduce- poverty substantially, as Chapter 1 reports. Preliminary estimates on the basis of SUSENAS 2000 suggest that, using the national poverty line, the poverty rate has declined substantially from its peak of 27 percent of the population in 1999 to around 15 percent (Table 4.1). While still higher than its pre-crisis low of 11 percent in 1997, it is now at a level comparable to that of 1996. Calculations using the international standard poverty lines of US$1 and US$2 a day per capita (at 1993 PPP prices) yield much the same conclusion. 4.4 The largest contributor to the reduction in poverty was rising income and a decline in food prices, notably that of rice. Estimates suggest that the drop in food prices between February 1999 and February 2000 explains around 41 percent of the decline in the poverty rate. More than three-quarters of this comes from the decline in the price of 69 rice.' Higher incomes explain the remaining 60 percent.2 But renewed inflation and rising food prices since February 1999 may indeed have reversed some of these gains. 4.5 Moreover, lest victory be declared prematurely, we should remind ourselves that the headcount index of poverty is only one of many poverty measures. It does not acknowledge the broader, multidimensional nature of poverty. When the concept of poverty is expanded to include these other dimensions - reduced vulnerability, access to health, education, and basic infrastructure, and a chance to participate in social and political life as equals - then the number of people considered poor increases considerably. Consider the concept of vulnerability alone. Another crisis (or even a sharp increase in the relative price of rice), and Indonesia's headcount index of poverty could double again. The huge difference in the poverty rate between the US$1 and US$2 a day poverty lines (Table 4.1) is clear evidence that a large proportion of the population is "near poor" and are constantly vulnerable to falling into poverty. Poverty reduction, therefore, cannot be construed simply as reducing the poverty headcount index, but also reducing the vulnerability of this broad swathe of the population, and should continue to be the overarching objective of government policy. Table 4.1 Latest estimates for Indonesia's poverty rate (Headcount index; percent of population) 1996 1999 2000 National poverty line Urban 7.2 16.3 7.3 IRural 20.5 34.1 20.7 lndonesia 15.7 27.1 15.2 |Other poverty lines: |US$1 a day 7.8 12.0 7.8 US$2 a day 50.5 65.1 57.9 Note: The US$ I and US$2 a day poverty lines are at 1993 PPP prices and are the standard poverty lines used to compare poverty rates across countries. They are applied to all Indonesia. Source: World Bank staff estimates based on SUSENAS data. These estimates differ from those in Tables 2 and 3 of the statistical annex because of different estimation methodologies. This estimate is based on 1999 expenditure weights. 2 Other factors, such as the change in price of non-food items, partially offset the poverty reducing effect of declining food prices and rising incomes. 70 The profille of poverty in rural areas - by region, 2000 * ~~~~~~~~~~~II 'X'~~C, Hea,dcon idex *273 b 3J.J |s) El18 t27.3 (J) 1|1I021b 18A (7) o 0a b 10.2 (i 0 rr 3) The profile of poverty in rural areas - by region, 2000 ir~~~~$ Hed&cuzt Idex *273 ID JJ.J S EISj tbiJ (2 ) Eisa b 16.+ (7) o 0 t 10.2 (5) o 14h (3) 71 4.6 Projecting poverty rates forward shows that they decline even under the muddle- through scenario - but only gradually. Indeed, by 2005, roughly the same proportion of the population will be below the US$2 poverty line as in 1996.3 Clearly, the muddle- through scenario does not lead to the poverty reduction rates that Indonesia could and should achieve - and highlights the importance of rapid growth as an important condition for reducing poverty and vulnerability. But as we noted at the beginning of this chapter, growth is not enough. What is also needed are pro-poor government policies and empowerment of the poor. Table 4.2 Lower rice prices helped reduce the poverty rate significantly (in percent of population) Treatment Headcount (percent) Actual poverty, 1999 27.1 Actual poverty rate, 2000 15.2 Difference 11.9 Accounted for by: Change in rice price only 3.8 hicreased incomes 7.5 Change in price of local chicken meat -0.1 Change in price of coconut oil 0.0 Change in price of cassava leaves -0.1 Other factors (non-food prices) -0.4 Source: World Bank staff estimates Government policies and the poor 4.7 The impact of government policy on poverty goes well beyond the impact of direct interventions. Economic policies sometimes inadvertently work against the poor, and may even divert resources away from them. Striking examples are rice policy and fuel subsidies, and emerging intergovernmental fiscal relations and land policies could be next. * Rice is the main food item for the poor. The Government has protected rice producers through import tariffs and domestic floor prices (see Chapter 2). The unintentional effect, unfortunately, has been to hurt the poor, including many poor farmers. Indeed, about two-thirds of farmers tend to work on such small land holdings that they are net consumers of rice - that is, they buy more rice on the open market than they sell. Naturally, if the relative price of rice rises as the result of a tariff, their real incomes 3 The poverty rate using the US$2 a day poverty line is projected to be 49.5 percent in 2005 (Table 4.3), and it was 50.5 percent in 1996 (Table 4.1). 72 Table 4.3 Poverty rates in the muddle through scenario a/ (Headcount index; percent of population) 2000 2001 2002 2003 2004 2005 Poverty Lines National 15.2 15.7 14.6 13.3 12.1 10.9 US$1 aday 7.8 7.1 6.5 5.8 5.5 4.5 US$2 a day 57.9 56.7 55.1 53.4 51.5 49.5 a/ The simulations from 2002 onward assume no change in relative prices or income distribution, but do take into account differences in sectoral growth rates. For 2001, we have incorporated changes in the relative price of food as of September. Source: World Bank staff estimates. fall. In recognition of this, an interdepartmental government team, created in January 2001, produced working papers and a technical proposal on future rice policy.4 It is important that in implementing this policy, rice tariffs should be capped and then reduced over time, and there should be no non-tariff barriers introduced. Instead the Government should focus on increasing farmer productivity by using existing infrastructure optimally, and accelerating the transfer of research findings into farmers' practices. - Fuel subsidy. Despite the price increases of April and June this year, the Government will spend some Rp. 62 Trillion on fuel subsidies in 2001. This is almost 20 percent of government spending, and half as much again as all development spending. Less than 5 percent of these subsidies reaches the poorest 20 percent of the population, and less than 10 percent reaches the poorest 40 percent. Moreover the fiscal burden of fuel subsidies means that development spending of benefit to the poor is squeezed. Fortunately, the Government is by now well aware of this misallocation of resources, 5 and has agreed with Parliament to increase fuel prices by an average of 30 percent next year. Part of the resources freed up can be used to compensate the poor, and as Chapter 1 pointed out, the program of choice for this should be OPK Beras. * Intergovernmental fiscal system. With decentralization, regional governments have become responsible for many of the services that are central to poverty reduction. Quite apart from the capacity of local governments and participation of the poor in decision making (two longstanding and well known concerns), a key factor for delivering public services to the poor will be the availability of adequate resources with regional governments. For regional governments as a whole this is the case, because increases in their revenues exceed their new expenditure responsibilities. But the distribution of the Rp. 84 trillion "balance fund' is, in fact, quite unbalanced. The 4Keputusan Kepala Bappenas no. 005/KA/01/2001 Tentang Tim Pengkajian Kebijakan Perberasan Nasional, 23 Januari 2001. 5 Quote form Megawati's budget speech. 73 general allocation fund (DAU) does equalize resources across regions by assisting the poorer regions more than the richer ones, and the distribution formula has been improved for next year. Yet deep fiscal inequalities persist among regions. Next year, the richest district or city will have thirty times more revenues per capita than the poorest.6 Even the disparity between the average district/city and the poorest one is 5 to 1. Historical patterns of spending, and the political need to accommodate demands from resource-rich regions explain some of this inequality. But if these patterns persist, they are likely to translate into significant inequalities in public service delivery and poverty alleviation efforts. The Government recently revised the formula to allocate Rp. 69.1 trillion in 2002 through general allocation funds and make the distribution more equalizing across regions. Disappointingly, Parliament asked government to revisit this decision so that no region would get less than last year. This will simply continue the inequalities that already exist. * Land. In practice, land laws and regulations work against the poor, who often hold only customary rights to land with no official title. Land conflicts are many and growing in frequency. They arise when large projects (for example, in infrastructure, construction, industrial, or plantations) need land. The poor are displaced time and again and compensated inadequately - and receive little protection from prevailing laws or the judicial system. A mechanism for adjudication and dispute resolution is not in place. Land titles help protect the rights of the poor, increase access to credit, and encourage sustainable use of natural resources. Since 1994, the National Land Agency (BPN) has issued over 2 million land certificates to the poor on Java. Broadening this approach to areas off Java will have to take account of more traditional communal land ownership patterns. In addition, Indonesia needs fundamental reforms to the legal and institutional framework for land administration. In this respect, it is encouraging that the MPR is in the final stages of accepting a draft directive of the Agrarian and Natural Resources Management Reform. The decentralization of land administration offers the opportunity for fundamental reform, but needs to progress with attention to the governance a framework to avoid the risk of simply decentralizing the previously corrupt and inequitable system. Investing in the poor 4.8 The crisis has placed considerable pressure on the central budget. The sharp rise in debt service and high fuel subsidies have left little room for development spending. While the Government made serious efforts to protect spending on services to the poor (health, education, and basic infrastructure services such as rural roads, clean water etc.), an overall drop in their budgetary share and per capita real spending could not be 6 And maybe more, if Parliament insists on a "hold harmless" of the rich regions that received an unwarranted amount of DAU in 2001 because their resource revenues were not counted as constituting fiscal capacity. 74 averted. To illustrate the consequences, we focus here on two key areas -- health and education. 4.9 Health. Efforts to maintain government spending on health and education at constant real levels, for example, were not successful. Total public sector health spending fell by 8 percent in 1997/98 and a further 12 percent in 1998/99. As a result of the crisis, government health expenditures per capita were not sustained at the peak pre-crisis figure, but were protected at or above the mid 1990s level. Nevertheless, average per capita outlays remained very low overall and were especially low in provinces such as West Java. During the economic downturn, much greater use was made of external assistance, but such support did not, it appears, contribute to the sustainability of health financing and spending. 4.10 There also were shifts in the composition of expenditures, including reduced per capita public spending on primary health care and a rise in per capita hospital outlays (Table 4.4). These trends in outlays ran counter to policy intentions and actual needs. In short, spending patterns exhibited significant weaknesses even as the country was shifting to new funding and allocation arrangements in 2001. Table 4.4 Public expenditures on health and education in Indonesia (Rp.'000s, per capita, in constant prices, 1993=100) 1996/97 1997/98 1998/99 1999/00 Health Primary care 10.3 9.6 8.5 8.2 Hospital care 4.1 4.4 4.6 5.3 Total 14.4 14.0 13.1 13.6 Education Primary 31.3 30.1 21.4 25.5 Junior secondary 11.5 11.9 8.1 9.1 Senior secondary 6.6 6.7 4.9 5.7 University 8.9 9.3 6.7 7.4 Non-formal 0.7 0.8 0.5 0.5 Total 59.0 58.8 41.5 48.2 Source: Ministry of Finance, Ministry of Health, BKKBN, Ministry of Education. 4.11 Education fared little better. Overall spending fell sharply (by over 28 percent) in real terms in 1998/99 before rebounding partially in 1999/2000. The share of education in the total budget fell from 13 percent to under 10 percent but then recovered to almost 14 percent in 2000. Real spending per student in 1999/2000 was 18 percent lower that in 1997/98 level. Primary school outlays per student (-13 percent change) were better protected than junior secondary (-25 percent), senior secondary (-19) and university 75 levels (-22 percent). Part of this trend of declining outlays per student can be explained by continued increases in enrollment at the secondary level (Table 4.5). Table 4.5 Use of health and education services by provider 1997 1998 1999 2007 Health a/ Modern provider b/ 12.8 10.5 10.6 9.0 Public 6.7 S.0 5.3 4.2 Private 6.7 6.2 5.9 5.4 Education c/ Primary 108.0 107.6 108.0 107.7 Junior secondary 74.2 73.4 76.1 77.8 Senior secondary 46.5 47.4 48.4 50.1 a! Percent of population that made at least one outpatient visit in the previous month b/ Public and private do not add up to "modern" because people can visit both providers in the same month. c/ Gross enrollment. Source: Susenas data tapes 4.12 These spending reductions were not as painful as they could have been due to the government's efforts to maintain basic education enrolment during the crisis through the Scholarships and Grants Program (SGP). The goal of the SGP was to sustain pre-crisis participation and quality levels in basic and secondary education throughout Indonesia. These aims have been achieved, at least partially: enrolment has been maintained and schools serving poor areas have continued to operate. Effects on student learning are harder to detect, in part because pre-crisis achievement levels were already quite low. SGP also introduced important institutional advances, including arrangements for transferring funds directly to districts and schools, along with mechanisms for receiving and acting upon community complaints. 4.13 These schemes are being continued, but there remains a dire need for improving the quality of basic education in Indonesia and for rehabilitating functioning schools in the poorest parts of the country. It appears that quality deficiencies are not easily attributable to overall resource constraints. In particular, junior secondary school expansion did not deprive primary school students of funds needed to finance quality improvements. Instead, quality problem may stem from the way resources are allocated, and the limited attention and commitment to quality on the part of education decision makers. One indication of this was the government's decision to draw on development budget allocations to finance expanding access, consisting mainly of junior secondary school construction. On the other hand, donor funds were used to raise learning attainment. While laudable, these quality-strengthening initiatives were project-based, and usually were not sustained after the project. 4.14 Consequences of low quality services. The low quality of health and education services is beginning to take its toll. International comparisons of education achievement 76 suggest that Indonesian schooling compares unfavorably with neighboring countries. Warning signals on low learning achievement began to accumulate in the early 1980s and continue to be seen. The PROPENAS (2000-2004) cites Indonesia's low ranking in recent cross-country assessments of reading and mathematical ability. At the same time, parental and community dissatisfaction was (and is) registered in different ways including high drop-out rates and relatively low proportions of students proceeding to middle school even in localities with accessible facilities. Till 2000, enrollment seems to have held steady (Table 4.5). Enrollment continues to improve and so does the share of the public sector in the provision of junior secondary education. This is because most of the increase in enrollment stems from poor families who rely on the public sector. 4.15 Quite a different picture emerges in health. Here the government faces more competition, and the use of public services is in decline. Use of outpatient public health services dropped by 25 percent at the outset of the crisis, recovered by 6 percent the following year, only to drop by another 20 percent from 1999 to 2000. Part of this decrease in the use of public services resulted from a shift toward private sector providers, but a growing share of the ill resorted to self-treatment. 4.16 Ensuring sustainable public service delivery to the poor will require more than increased funding alone. First, the resources should be allocated to pro-poor priorities such as primary health care and education rather than curative care and tertiary education. Second, because service delivery is now largely decentralized, it requires appropriate institutional arrangements that govern the roles and accountability of the center and regional governments, and empowernent of the poor so that they have a voice in the allocation of public resources and can ensure sufficient and effective implementation of public service delivery. Reducing poverty in a decentralized environment 4.17 The impact of the decentralization process on the poor is difficult to determine at this early stage. The difficult transfer of civil servants and government facilities has gone surprisingly well, but the regulatory framework shows signs of haste, and the regions have little guidance of what is expected of them. Capacity of the civil service is highly uneven across the country, and seems to be getting more uneven, as some regions have signaled problems in obtaining key personnel in education and health. Moreover, the uneven distribution of fiscal resources is likely to have its consequences for inequality of service delivery.7 And simply the added difficulty of monitoring public expenditures on key services and their outcomes when a large part of government spending is decentralized will prove a serious challenge. Finally, the regional governments seem to have an appetite for increasing local levies and charges. If history is any guide, this could hurt the poor, notably poor farmers whose farm gate prices will drop if transport costs 7 Before decentralization, Indonesia showed a remarkable equality of human development indicators, which was hardly correlated with per capita output. See M. Zulfan Tajoeddin e.a. Regional Disparities and Centre-Regional Conflicts in Indonesia, UNSFIR Working Paper 01/01-E, 2001. 77 increase because of levies, and small industries for whom low fixed costs is their only competitive advantage.8 4.18 The transition to a decentralized system presents important hurdles, however, as illustrated by experience with basic immunization. Responsibility for what had been one of the most centralized health programs was largely shifted to provinces and districts. They are expected to finance most of the operational costs, with sharply lower resources from the center. While complete data are not available, a recent World Bank supervision mission to two provinces revealed that none of the districts visited by the mission had allocated any resources for immunization in their annual budget plans. This could reflect either: weak advocacy by the central government; a serious lack of district capacity in priority setting; "free rider" behavior by local governments; or the districts' collective belief that the central government might be forced to resume funding for this basic public health service. 4.19 Education is a further example of transitional difficulties. Thousands of teachers went on strike because back pay due to a salary increase was not paid out. The reason for this was that the central government-which determines wages-announced the salary increase largely after local budgets had been passed. Thus, even though the central government increased the grants to the regions to cover the increase, this could not be disbursed because there was no authorized budget. 4.20 Early indications from the regions give cause for concern. An analysis of 146 approved district budgets reveals that the average share spent on development dropped from 36 to 32 percent between FY2000 and 2001. Furthermore, the share in the total development budget decreased slightly for education (52 to 48 percent) although it increased for health (from 25 to 30 percent). But there are large variations between districts, and data are incomplete and not always of high quality. Moreover, they represent budget plans; what is actually implemented - and the outcomes they produce - will need to be evaluated as the data come in. 4.21 One advantage of decentralization is that it offers opportunities for local initiatives. This has started to show. New funding arrangements in NTB target education expenditures to students, not facilities, and so increase competition among service providers. Many regions went through a participatory planning and budgeting process, while all regional heads had to submit their "Renstra" - which specify clearly the local government's goals. Budget watchdogs have sprung up in large numbers in the regions (Box 4.1). And several provinces have started health projects that will link their districts 8 SMERU has reported extensively on this phenomenon. Their reports show that after the introduction of law 18/1997 which abolished many fees and taxes, farm gate prices rose. In their recent work that tracks a number of regions during decentralization, they have observed a significant increase in fees. See for instance, SMERU, Otonomi Daerah dan 1ldama Usaha, Bahan Konferensi, April 2001. 78 Box 4.1 Budget watchdogs in the regions FITRA (Forum Indonesia untuk Transparansi Anggaran) in North Sumatra is a new NGO that monitors the transparency of the region's budget. FITRA is a network consisting of around 30 North Sumatran NGOs. The organization is largely funded by the Ford Foundation, but undertake studies financed by other sources as well. Their most recent effort, funded by the British Council, was a three months study of public services. They facilitated meetings between housewives and public transport providers on the implications of the decreased fuel subsidy for public transport fares for school children. Last year, they analyzed the province's budget; this year they will analyze the budgets of two districts in addition to that of the province. The two districts were chosen because the government informed them that these are the ones most prepared for decentralization. They also intend to campaign for more open debate in the preparation of the provincial budget. The debate will be focused on how responsive is the government towards poverty, education, women' s empowerment and health. with the province to capture economies of scale of province-wide initiatives. These tender green shoots of local initiatives and responsiveness may not necessarily herald a spring, but they certainly give cause for hope. 4.22 While decentralization may spur innovation and cut costs, there is no guarantee that regional governments will show greater focus on poverty reduction than the center. For one, regional elites may capture local institutions for their own purposes, and divert resources away from pro-poor activities. Moreover, poverty programs tend to have positive externalities, so regional governments may be disinclined to devote significant resources to an activity that may yield benefits outside the region. 4.23 Ensuring minimum standards for service delivery could help, but apart from being hard to specify for poverty programs, they could also stifle local initiatives. Moreover, some aspects of poverty programs are best implemented locally, such as identifying the poor. To resolve this dilemma, the Government (and external creditors and donors) will need to make greater use of the special allocation grant mechanism (dana alokasi khusus or DAK) for poverty programs. Currently, the DAK is only used for reforestation, but central government could prepare a DAK that funds poverty programs in the regions, possibly with cost sharing depending on the region's fiscal capacity. Empowering the poor 4.24 The poor need to be empowered to shape the policies and programs that affect their lives and ensure efficient and effective implementation of public service delivery. In a decentralized environment this is easier to do than in a centralized one, but it is not a 79 guarantee for participation. Artificially "creating" participation through government sponsored organizations may not be an appropriate solution (Box 4.2). But steps toward more participation can be taken at every level of decision making on programs that benefit the poor. From consultation in the planning stage, to community implementation of programs, to monitoring of poverty programs, the poor or organizations with strong affinity for the poor should be involved to ensure their voice is heard when local governments allocate resources, approve program design, and implement projects. Box 4.2 The chilling presence of government The World Bank-funded "Local Level Institutions Study" documents changes in the social landscape and its effect on local decision making. The study uses a panel of 1000 households in 48 villages, and compares results with initial work conducted in 1995/1996. Several findings emerge. * First, the study reveals the vibrancy of local endogenous institutions before and during the recent political changes. Strong local capacity exists and there are as many locally initiated and funded activities as existing government programs. * Second, a household's own involvement with government-sponsored organizations tends to increase their reports of positive voice, participation, and information. Interestingly, it also tends to decrease the reports of positive voice etc. of those households in the village that are not members of these organizations. A similar "chilling effect" was found in the dissemination of information. Again, a larger share of household members in government- sponsored organizations said they were being informed while non-members said their access to information had decreased. * Third, households living in a village where more people are members of the government sponsored village organizations are substantially less likely to be engaged in a protest. This is in contrast to the pattern found for membership in locally initiated social organizations: membership in locally initiated organization tends to increase the likelihood of a household being involved in protest activity (1.26 percentage points), and households living in villages with higher membership rates in locally initiated organizations tend to participate more often in protest activities (2.83 percentage points). The study demonstrates the dangers of relying solely on official administrative structures without efforts to broaden participation and allow groups outside government sponsored institutions to have effective voice in local decision making. At a broader level, this empirical work extends the literature on "social capital" by demonstrating that not all local organizations are equal. Depending on who is doing the organizing, and why, increased participation in local organizations can either be exclusionary and reinforce existing divisions and structures (as appears to be the case for mandatory government organizations), or can widen the base of voice, information, and participation and increase the responsiveness of local government. Government and civil society are presently working on separate tracks, and getting them to work together will require major changes in the way local governments work with local communities. 80 4.25 There is considerable international and Indonesian experience with participatory policy processes to build on. The participatory planning and budgeting processes in Bima, the Philippines' report card on pro-poor services, the implementation of the Kecamatan Development Project (Box 4.3), and NGO participation in South Africa's Medium Term Expenditure Framework" - these are all examples of meaningful participation in govemment decision making. Ironically, it seems to be Parliaments at central and local level that are least inclined to hear the voices of the people: public hearings on draft bills or regional regulations seem to be more the exception than the rule, and debates often only become public when the major decisions have been taken. Box 4.3 How a community, demand-driven, project like KDP can reduce poverty KDP is a large, decentralized community development project in Indonesia. It covers more than 15,000 villages in approximately 27 provinces across the country. It works by giving villagers decision-making power over funds, which can be used either as grants for village infrastructure or as loans for income-generating ventures. The project is designed to give villagers the chance to prioritize village development needs and a say over how village resources are used. Villages compete with one another for project funds, giving villages an incentive to propose well-designed projects of demonstrable benefit. How does a project like KDP support Indonesia's fight against poverty? Simply put, KDP works by strengthening local institutions, both formal and informal. For many of the most basic kinds of poverty fighting investments, local people are those who know best how to match local needs with available resources. KDP produces more economically productive infrastructure at lower cost for poor villages than any similar projects. Villagers, especially the poor, have the right: * to participate in all aspects of the project, from planning and decision making to implementation. About six months before the start of a project, KDP facilitators disseminate information about KDP by holding open village meetings; talking about KDP at local gatherings; meeting with small groups of villagers, including women-only groups; and publicizing information about KDP on village notice-boards. In this way, villagers are able to learn about their rights in KDP and about what to do if they are dissatisfied with it. * to transparency. According to KDP rules, all financial information must be publicly disclosed. This includes details of budgets for original proposals; information about salaries and honoraria for all project participants; market prices of materials for infrastructure; details of funds borrowed as micro-credit and rates of repayment; details of bank withdrawals; and receipts and accounts for all project monies spent. * to be protected from corruption and misuse of funds: Funds are transferred directly from the center to kecamatan-level bank accounts, with no local government control over funds. It also gets rid of all bureaucratic procedures usually associated with development projects, such as intermediary forms and approvals. By getting rid of red tape and direct government management, it minimnizes in one step many of the opportunities to skim funds. Villagers control project budgets, and financial formats are simplified so villagers can understand them and they can tell when money seems to be missing. 81 Mainstreaming poverty reduction 4.26 Poverty reduction requires growth in which the poor can participate fully. Effective delivery of public services to the poor is essential to meet this objective. All the issues raised in this report have some consequences for one or other - from economic stability to the investment climate, from governance to the role of local governments in public service delivery. And so it is the case with Government. If it is to take poverty alleviation seriously, and push beyond the current paradigm, all government interventions - policies, programs, and projects - will need to be viewed through the prism of poverty reduction so that the overall thrust of government policy is in the desired direction. Poverty, therefore, cannot be viewed as distinct from development. The development strategy incorporated in the PROPENAS is a poverty reduction strategy. Just as that document correctly indicates, the right approach to poverty reduction is to mainstream it into all government activities. 4.27 The Coordinating Agency for Poverty Reduction was created in March 2001 to help prepare the country's poverty reduction strategy in consultation with stakeholders and to provide guidance on the implementation of the strategy. The agency was able to gradually build a core of expertise and prepared a draft agenda for consultations with stakeholders,9 and a "Poverty Toolkit" to assist regions in shaping their policies and programs from a poverty reduction perspective. 4.28 Subsequently, however, in October 2001, the agency was abolished, and the President announced that the Coordinating Ministers for the Economy and People's Welfare will henceforth be jointly responsible for developing and implementing the country's poverty reduction strategy. The Coordinating Minister for Welfare will bring strengths in program implementation and practical problem solving. The Coordinating Minister for the Economy will provide the overall strategic direction and cohesive focus needed to ensure that future growth and development brings with it lasting benefits for the poor. 4.29 The need for a poverty reduction strategy should not be to have yet another government document or to satisfy the international creditor and donor community, but to coordinate all the arms of government, inform all government departments of their role in the grand design, and ensure that the public and the poor (as well as the international community) understand the government's approach so they can support it. 4.30 To be meaningful, all stakeholders - central and local government line ministries and agencies, central and local parliaments, non-government organizations, the poor themselves, and the international community - should be consulted in the preparation of such a strategy. Such consultations constitute a dual purpose - it could be an avenue for receiving good ideas, but it is also an important means of disseminating the government's own vision of the future and what it means for the poor. 9 "Building a National Consensus for Poverty Reduction", Draft for discussion, Jakarta, August 2001. 82 Conclusion 4.31 Poverty reduction remains the overarching objective of Government - as well as the international community. To achieve it will require the coordinated effort of all government departments, the international community, non-government organizations, and of course the poor themselves. And it will take the entire range of instruments in the government's arsenal of interventions. To ensure these actors and instruments are all working toward the same goal will require the preparation of a poverty reduction strategy that is the product of consultation with all the key stakeholders - and truly represents a national consensus. The appointment of the two coordinating ministers to lead this effort is encouraging, but it is only the first step in a long-term effort - one in which the country cannot fail. Statistical Annex 83 STATISTICAL ANNEX List of Tables Social Indicators 1 Selected Social Indicators, 1990-2000 2 Key Social Indicators 3 Poverty Line and Number of People Below the Poverty Line 4 Population and Growth Rates by Province, 1971-2000 5 Labor Force Participant by Province (%), 1980-2000 6 Employment by Main Industry, 1990-2000 National Income Accounts 7 Gross Domestic Product by Industrial Origin at Current Market Prices, 1990-2001 8 Gross Domestic Product by Industrial Origin at Constant Market Prices, 1990-2001 9 Gross Domestic Product by Expenditure Category at Current Market Prices, 1990-2001 10 Gross Domestic Product by Expenditure Category at Constant Market Prices, 1990-2001 International Trade & Balance of Payments I 1 Balance of Payments, 1994-2001 12 Selected Non-oil Exports, 1990-2001 13 Value of Exports by Principal Country of Destination, 1990-2001 14 Value of Imports by Principal Country of Origin, 1990-2001 External Debt 15 External Public Debt Outstanding including Undisbursed as of December 31, 2000 16 Service Payments, Commitments, Disbursements and Outstanding Amounts of Total External Debt, 1980-2013 17 External Debt Outstanding December 1997-June 2001 Public Finance 18 Central Government Budget Summary, 1994/95-2002 19 Central Government Revenues, 1994/95-2002 20 Central Government Expenditures, 1994/95-2002 d With the exception of the tables on External Debt, the Statistical Annex is a compilation of official data from Government sources. In some instances, these data may differ from data in the main text due to different Bank definitions and methodologies in constructing the statistical series. Statistical Annex 84 Monetary Statistics 21 Money Supply (Ml), 1991-2001 22 Changes in Money Supply and Affecting Factors, 1990-2001 23 Consolidated Balance Sheet of the Monetary System, 1990-2001 24 Banking System Credits by Economic Sector, 1990-2001 25 Banking Credits Outstanding in Rupiah and Foreign Exchange by Group of Banks, 1990-2001 26 Commercial Banks' Outstanding Investment Credits in Rupiah and Foreign Exchange by Economic Sector, 1990-2001 27 Commercial Banks' Outstanding Funds in Rupiah and Foreign Exchange by Group of Banks, 1990-2001 28 Interest Rates, 1990-2001 Agricultural Statistics 29 Principal Agricultural Products by Subsectors, 1990-2000 30 Production of Major Crops by Type of Estate, 1990-2000 31 Rice-Area Harvested, Production and Yield, 1990-2001 Industrial Statistics 32 Production of Minerals, 1990-2001 33 Fuel Production by Company, 1990-2001 34 Domestic Sales of Petroleum Products, 1990-2001 Prices 35 Domestic Prices of Petroleum Products, 1985-2001 36 Indonesia Wholesale Price Index, 1990-2001 37 Consumer Price Index, 1990-2001 Investment Statistics 38 Approved Foreign Direct Investment by Sector, 1990-2001 39 Approved Domestic Investment by Sector, 1990-2001 Table 1. Selected Social Indicators, 1990-2000 1990 1993 1996 1999 2000 Demo2ranhy Population (million) 179.5 189.1 198.3 206.5 203.5 Population ages 0 - 14 yr old (%) 36.5 34.9 32.0 30.0 29.8 Population ages 15 - 64 yr old (%) 59.6 61.3 63.8 65.3 65.6 Population ages 65+ yr old (%) 3.9 3.8 4.2 4.7 4.6 Population growth rate (%) 2.0 1.7 1.6 1.6 1.4 Population density (per Km2) 94 99 103 107 106 Urban population, % urban to total 30.9 34.0 37.1 39.4 42.1 Gender ratio, male to 100 females 99.5 99.5 99.1 99.1 99.8 Dependency ratio (%) 67.8 63.4 57.0 53.1 52.4 Education Elementary school net enrollment ratio, % of relevant aged group 83.2 91.5 94.8 92.7 94.9 Junior high school net enrollment ratio, % of relevant aged group 40.5 .. 48.6 59.2 60.8 Senior high school net enrollment ratio, % of relevant aged group .. .. .. 38.5 39.8 Population > 10 yr old not completed primary school (%) 37.5 41.8 40.1 35.4 34.0 Population > 10 yr old finished primary and Junior high school (%) 48.8 46.3 45.0 47.0 47.7 Population > 10 yr old finished high school and college (%) 13.7 11.9 14.9 17.6 18.3 Adult literacy rate 81.5 83.3 85.3 88.4 88.6 Health Life expectancy rate 62.5 62.7 63.2 65.5 68.0 Fertility rate, births per woman 3.1 2.9 2.8 2.6 2.5 Infant mortality rate, per 1000 live births 63.5 58.1 56.0 46.0 44.0 Mortality rate of children < 5 yr old, per 1000 86.4 78.1 70.4 59.6 44.7 Children < 5 yr old that have good nutrition (%) 54.2 55.5 63.9 69.7 71.1 Children < 5 yr old that had been immunized (%) 69.3 76.3 88.2 89.9 90.1 Number of medical doctor per 100,000 population .. 10.4 10.7 10.8 Housing and Sanitation Household with access to piped water (%) 12.9 14.7 16.7 18.6 18.6 Household with access to own septic tank (%) 17.9 22.0 26.1 30.4 28.5 Household with electricity (%) 46.8 55.3 72.2 83.7 86.3 Labor force Employed (%) 55.9 55.1 55.5 62.9 63.6 Looking for work (%) 1.44 1.56 2.85 4.27 4.12 Labor force participation (%) 57.3 58.0 58.3 67.2 67.8 Open unemployment rate (%) 3.2 4.3 4.9 6.4 6.1 Working children in 10-14 year old group (%) 9.5 10.8 7.9 6.9 4.7 Poverty and ineauality Number of people under poverty line (million) 27.2 25.9 34.5 /a 48.4 /a Population under poverty line (%) 15.1 13.7 17.7 /a 23.5 /a Expenditure share of the lowest 40%, (%) 21.3 14.6 20.2 21.3 Expenditure share of the middle 40%, (%) 36.8 41.6 35.0 37.0 Expenditure share of the highest 20%, (%) 41.9 43.9 44.7 41.6 Gini Coefficient 0.32 0.34 0.36 0.32 ..: Data are not available /a Using Susenas 1998 definition of the poverty line (the "new" definition). Source: Central Bureau of Statistics. Table 2. Key Social Indicators Indicator Latest Period Previous Period Indicator Latest Period Previous Period Poverty Rate (%) Feb-99 Feb-96 Literacy Rate (%) 2000 1999 - National 23.5 17.7 - National 88.6 88.4 - Urban 19.5 13.6 - Urban 94.0 94.0 -Rural 26.1 19.9 -Rural 84.4 84.5 Inequality (Gini Coeffident) Feb-99 Feb-96 School Dropout (%) 2000 1999 - National 0.32 0.36 - Primary school 1.4 1.4 -Urban 0.33 0.37 -Juniorhighschool 2.1 2.2 - Rural 0.25 0.28 - Senior high school 2.6 2.6 Mortality Rate 2000 1999 Health Faclities 1999 1998 - Infant Mortality Rate 44.0 46.0 - Comnmunity Health Centers: - Mortality rate of children < 5 yr old 44.7 65.5 * Total number 42,247 36,307 * Per 100,000 population 20.4 17.8 Nutritional Status of Children under Five 2000 1999 - Hospitals: -Good(%) 71.1 61.1 *Totalnurnber 1,111 1,112 -Mediurn(%) 18.4 21.2 *Numberofbeds 123,598 123,168 - Bad (%) 10.5 16.6 * Beds per 100,000 population 59.4 60.3 - Medical doctor per 100,000 population 10.8 11.0 School EnroUment (%) 2000 1999 - 7-12 years old: Labor Force Participation 2000 1999 * National 95.5 95.3 - National 67.8 67.2 * Urban 97.3 97.5 -Urban 61.2 61.2 * Rural 94.4 94.2 - Rural 72.8 71.6 -13-15 years old: * National 79.6 79.0 Hourly Real Wages (1999 Rp) 2000 1999 * Urban 88.3 88.0 -Agriculture 1,542 1,323 * Rural 73.8 73.6 - Manufacturing 2,108 1,648 -16-18 years old: - Construction 2,168 1,843 *National 51.2 51.1 -Trade 1,936 1,661 *Urban 66.7 68.8 -Transportation 2,586 2,111 *Rural 38.4 38.0 -Finance 4,127 3,160 - Services 3,129 2,663 - Others 3,396 3,200 Source: Central Bureau of Statistics. Table 3. Poverty Line and Number of People Below the Povertv Line Year 1976-1996 Poverty Line Number of Percentage of Year (Rp/capita/month) People Below the Poverty Line Population Below the Poverty Line (million) (%) Urban Rural Urban Rural Urban+Rural Urban Rural Urban+Rural 1976 4,522 2,849 10.0 44.2 54.2 38.8 40.4 40.1 1978 4,969 2,981 8.3 38.9 47.2 30.8 33.4 33.3 1980 6,831 4,449 9.5 32.8 42.3 29.0 28.4 28.6 1981 9,777 5,877 9.3 31.3 40.6 28.1 26.5 26.9 1984 13,731 7,746 9.3 25.7 35.0 23.1 21.2 21.6 1987 17,381 10,294 9.7 20.3 30.0 20.1 16.1 17.4 1990 20,614 13,295 9.4 17.8 27.2 16.8 14.3 15.1 1993 27,905 18,244 8.7 17.2 25.9 13.5 13.8 13.7 1996 38,246 27,413 7.2 15.3 22.5 9.7 12.3 11.3 Year 1996-1999/a Poverty Line Number of Percentage of Year (Rp/capitatmonth) People Below the Poverty Line Population Below the Poverty Line (in million) (%) Urban Rural Urban Rural Urban+Rural Urban Rural Urban+Rural 1996 42,032 31,366 9.6 24.9 34.5 13.6 19.9 17.7 1998 /b 96,959 72,780 17.6 31.9 49.5 21.9 25.7 24.2 1999/c 92,409 74,272 15.7 32.7 48.4 19.5 26.1 23.5 /a Using Susenas 1998 definition of the poverty line (the "new" definition). /b Based on Susenas of December 1998. /c Based on Susenas of February (regular) 1999. Source: Central Bureau of Statistics. Table 4. Population and Growth Rates by Province. 1971-2000 Region Population (thousand person) /a Average growth rate (percent per year) 1971 /b 1980 1990 1995 2000 1971-1980 1980-1990 1990-2000 Java 76.086 91,270 107,581 114,980 120,429 2.0 1.7 1.1 DKI Jakarta 4,579 6,503 8,259 9,144 8,385 4.0 2.4 0.2 West Java 21,624 27,454 35,384 39,340 43,553 2.7 2.6 2.1 Central Java 21,877 25,373 28,521 29,691 30,857 1.7 1.2 0.8 DI Yogjakarta 2,489 2,751 2,913 2,917 3,109 1.1 0.6 0.7 East Java 25,517 29,189 32,504 33,889 34,526 1.5 1.1 0.6 Sumatra 20,809 28,017 36.507 40,984 42 666 3.4 2.7 1.6 Lampung 2,777 4,625 6,018 6,680 6,654 5.8 2.7 1.0 Bengkulu 519 768 1,179 1,418 1,405 4.5 4.4 1.8 South Sumatra 3,441 4,630 6,313 7,239 7,757 3.4 3.1 2.1 Riau 1,642 2,169 3,304 3,923 4,734 3.1 4.3 3.7 Jambi 1,006 1,446 2,021 2,383 2,401 4.1 3.4 1.7 West Sumatra 2,793 3,407 4,000 4,334 4,228 2.2 1.6 0.6 North Sumatra 6,622 8,361 10,256 11,144 11,476 2.6 2.1 1.1 Aceh 2,009 2,611 3,416 3,863 4,011 3.0 2.7 1.6 Kalimantan 5,155 6.723 9100 10,520 10,948 3.0 3.1 1.9 West Kalimantan 2,020 2,486 3,229 3,650 3,740 2.3 2.6 1.5 Central Kalimantan 702 954 1,396 1,636 1,802 3.5 3.9 2.6 South Kalimantan 1,699 2,065 2,598 2,904 2,970 2.2 2.3 1.3 East Kalimantan 734 1,218 1,877 2,330 2,437 5.8 4.4 2.6 Sulawesi 8.528 10,409 12,521 13,775 14,446 2.2 1.9 1.4 Central Sulawesi 914 1,290 1,711 1,946 2,066 3.9 2.9 1.9 North Sulawesi 1,719 2,115 2,478 2,655 2,821 2.3 1.6 1.3 South Sulawesi 5,181 6,062 6,982 7,578 7,787 1.8 1.4 1.1 Southeast Sulawesi 714 942 1,350 1,596 1,772 3.1 3.7 2.8 Other Islands 8,630 11072 13.672 15,035 14.966 2.8 2.1 0.9 Bali 2,120 2,470 2,778 2,900 3,125 1.7 1.2 1.2 West Nusa Tenggara 2,203 2,725 3,370 3,655 3,822 2.4 2.1 1.3 East Nusa Tenggara 2,295 2,737 3,269 3,588 3,929 2.0 1.8 1.9 Maluku 1,089 1,411 1,858 2,095 1,978 2.9 2.8 0.6 IrianJaya 923 1,174 1,649 1,954 2,113 2.7 3.5 2.5 Indonesia 119,208 146.935 178,631 195.294 203,456 2.35 1.97 1.31 /a Based on Population survey 1971, 1980, 1990, 1995 and 2000. lb Includes adjustment for the exclusion of rural Irian Jaya. Source: Central Bureau of Statistics. Table 5. Labor Force Participation by Province (%). 1980-2000 Region 1980 1985 1990 1995 1996 1997 1998 1999 2000 Java 50.9 53.1 56.8 56.1 57.7 58.0 65.5 66.7 67.0 DKI Jakarta 42.3 42.6 44.3 48.6 51.2 53.1 58.2 60.2 West Java 45.4 48.2 51.6 51.8 52.5 51.7 60.4 61.9 Central Java 54.9 57.1 62.2 60.2 62.5 61.4 71.2 72.2 Dl Yogjakarta 58.9 61.1 64.9 60.6 61.3 63.0 67.7 69.6 East Java 53.0 56.4 60.9 59.4 60.9 60.8 69.8 69.8 Sumatra 50.2 52.7 57.2 55.9 58.2 57.8 68.4 66.9 68.5 Lampung 50.2 53.4 59.3 57.8 60.6 57.5 71.6 68.5 Bengkulu 55.1 58.8 66.4 60.8 65.3 63.4 74.9 74.1 South Sumatra 51.9 53.2 56.2 55.1 57.3 57.5 68.4 69.8 Riau 47.1 48.5 50.3 52.6 54.5 55.1 63.7 61.5 Jambi 51.2 52.2 56.2 52.5 56.9 55.0 66.8 65.9 West Sumatra 46.9 50.2 54.2 54.5 55.7 56.7 66.4 64.8 North Sumatra 52.5 52.5 56.9 57.2 58.3 58.5 68.4 69.0 Aceh 46.9 52.8 58.3 56.9 57.0 58.5 66.7 61.7 Kalimantan 53.0 56.0 60.0 59.7 62.1 61.3 69.5 69.4 70.9 West Kalimatitan 57.8 58.2 61.2 61.2 61.7 61.4 69.0 69.6 Central Kalimantan 57.8 57.3 63.4 60.5 65.1 64.1 69.4 70.2 South Kalimantan 51.8 56.7 60.0 61.0 64.5 65.5 72.9 73.0 East Kalimantan 44.7 51.8 55.3 55.9 57.0 54.4 66.8 64.9 Sulawesi 44.7 50.4 55.6 55.6 57.6 57.7 65.2 65.1 62.8 Central Sulawesi 45.3 48.4 54.9 55.0 55.8 55.5 60.1 61.0 North Sulawesi 49.5 53.4 58.0 59.8 61.8 62.3 70.4 70.4 South Sulawesi 39.4 42.9 49.2 50.0 54.1 52.5 61.5 60.2 Southeast Sulawesi 44.9 57.0 60.3 57.4 58.7 60.7 68.9 68.9 Other Islands Bali 53.6 61.1 68.4 69.0 70.1 70.8 76.8 76.4 West Nusa Tenggara 50.1 51.6 61.1 61.8 63.5 65.5 70.8 72.1 East Nusa Tenggara 53.0 61.2 67.3 64.1 65.4 65.3 74.1 73.4 Maluku 42.2 58.7 49.8 50.1 55.0 53.8 64.8 67.3 Irian Jaya 48.3 59.6 62.6 65.3 63.8 66.6 75.5 76.8 Indonesia 50.2 53.0 57.3 56.6 58.3 58.0 66.9 67.2 67.8 Data are not available Source: Central Bureau of Statistics. Table 6. Employment by Main Industrv ,1990-2000 /a 1990 1995 1996 1997 1998 1999 2000 Main Industry mnillion % rnillion % million % million % million % rnillion % mrillion % Agriculture, forestry, hunting & fishery 35.5 50.1 35.2 44.0 37.7 44.0 35.8 41.2 39.4 45.0 38.4 43.2 40.5 45.1 Mining and quarrying 0.7 1.0 0.6 0.8 0.8 0.9 0.9 1.0 0.7 0.8 0.7 0.8 0.5 0.5 Manufacturing 8.2 11.6 10.1 12.6 10.8 12.6 11.2 12.9 9.9 11.3 11.5 13.0 11.7 13.0 Electricity, gas & water 0.1 0.1 0.2 0.3 0.2 0.2 0.2 0.3 0.1 0.2 0.2 0.2 0.1 0.1 Construction 2.8 4.0 3.8 4.7 3.8 4.4 4.2 4.8 3.5 4.0 3.4 3.8 3.5 3.9 Wholesale andretail trade &restaurants 10.6 15.0 13.9 17.3 16.1 18.8 17.2 19.8 16.8 19.2 17.5 19.7 18.5 20.6 Transportation, storage & comnunications 2.7 3.8 3.5 4.3 3.9 4.6 4.1 4.8 4.2 4.7 4.2 4.7 4.6 5.1 Finance, insurance, real estate & business serv. 0.5 0.7 0.7 0.8 0.7 0.8 0.7 0.8 0.6 0.7 0.6 0.7 0.9 1.0 Public services 9.7 13.7 12.1 15.1 11.7 13.7 12.6 14.5 12.4 14.1 12.2 13.8 9.6 10.7 Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total 70.8 100.0 80.1 100.0 85.7 100.0 87.0 100.0 87.7 100.0 88.8 100.0 89.8 100.0 /a 1990-1998 data refer to population of 10 years of age and above who worked during the week prior to the census, starting 1999 data refer to population 15 years of age and above. Source: Central Bureau of Statistics. Table 7. Gross Domestlic Product by Industrial Oririn at Current Market Prices. 1990-2001 /a (Rp. billion) 1983 base 1 1993 base 1990 1991 1992 1993 1993 1994 1995 1996 1997 1998 1999* 2000* 2001** !________________________________________________________________________________ Jan-Jun 1 Aericulture. Livestock 42.149 44.721 50733 55746 i 58.963 66072 7 872 172.828 216.914 218,398 122,617 Forestry and Fishery _ a.Farmfoodcrops 25,908 26,149 29,443 31,404 f 32,093 34,941 42,200 47,622 52,189 91,346 115,135 110,641 65,459 b. Non-food crops 6,667 7,604 8,717 9,422 | 9,015 10,587 12,667 14,435 16,447 33,290 36,692 34,785 17,131 c. Livestock products 4,368 5,126 6,041 7,026 6,203 7,102 8,079 9,524 11,688 15,744 23,939 27,507 15,753 d.Forestry 1,855 2,018 2,180 2,541 6,268 6,897 7,390 8,171 9,807 11,701 13,840 15,078 7,962 e. Fishery 3,352 3,823 4,353 5,353 5,385 6,544 7,561 9,041 10,878 20,748 27,308 30,388 16,312 2. Minine & Quarryine 26,119 31,403 29.907 30.750 31A97 33,507 40,195 46.088 55.562 120.329 109.974 166.563 94.009 a.Oil&naturaigas 21,789 26,126 23,384 23,169 23,121 23,070 25,410 28,118 34,037 74,884 71,847 123,410 65,387 b. Oth. mining & quanrying 4,330 5,277 6,523 7,581 8,377 10,437 14,785 17,970 21,525 45,445 38,127 43,153 28,622 3. Manufacturine 38.910 47,666 56.542 67.441 1 73556 89.241 109.689 136.426 168,178 238.897 287.703 336,053 184A27 a. Refinery oil 3,575 3,807 4,322 5,211 I 5,541 5,855 6,599 8,340 8,116 15,092 16,217 21,824 13,002 b. LNG 3,715 4,714 4,384 4,253 j 4,253 4,584 4,800 5,854 7,506 18,080 18,325 28,108 14,666 c. Non-oil & gas mfg. 31,621 39,145 47,836 57,977 63,763 78,802 98,290 122,232 152,556 205,725 253,161 286,121 156,759 4. Electricity. gas & water L258 1750 2.148 2.714 3290 4,577 5,655 6.893 7,833 11.283 13,429 15.072 8241 5. Construction 10.749 12.902 15.305 18.140 22.513 28.017 34452 42025 46,679 61,762 74.496 92.176 50.644 6. Trade, Hotels & Restaurants 33.000 36.954 22 49.789 55,298 63.859 72,843 87,137 99,582 146,740 176, 196.050 108.337 a. Retail & wholesale trade 27,712 30,770 35,645 41,496 j 44,605 51,134 60,379 69,375 77,543 116,689 141,099 156,324 86,113 b. Hotels & Restaurants 5,288 6,184 7,086 8,293 10,693 12,725 12,464 17,762 22,039 30,052 35,565 39,726 22,225 7. Transport & Communications 11.,000 13,908 17,099 20.728 23249 27.353 30.795 34.926 38.531 51.937 55.190 64550 37.407 a. Transport 9,694 12,327 15,133 18,183 20,101 23,191 25,477 29,246 31,498 41,837 42,736 49,337 29,032 b. Communications 1,306 1,581 1,966 2,545 3,148 4,162 5,318 5,680 7,033 10,100 12,454 15,213 8,375 8. Banks & Finance 8.287 10,158 250 15,257 17,818 20.852 21.853 24.831 31.710 30.529 34.901 20.334 9. Ownership of Dwellinesfb 4.891 5.925 6.596 7.611 9 9695 11,239 11.899 13,649 17.715 23,140 24A434 27.272 14.900 10. Other Services 19,236 22.065 26,323 33.842 37.709 40,539 47,441 54.779 67,402 97.128 120,648 139.649 75344 a. Public 12,801 14,622 17,309 22,458 22,458 22,755 26,555 29,753 32,128 40,641 56,745 69,460 36,892 b. Other Private & Services /c 6,434 7,443 9,014 11,384 15,251 17,784 20,886 25,026 35,274 56,487 63,903 70,189 38,452 Gross Domestic Products 195,597 227.5 29.885 302018 f 3294776 I 4512717 532B568 627.321 955:753 L1109.980 L290 71658 *: Preliminary figures. ** Very preliminary figures. la. In 1996, the Government released national accounts series using the 1993 base. /b. Using the 1983 base, this line refers only to Ownership of Dwellings. Using the new base, it includes Real Estates. /c. Includes Business Services. Source: Central Bureau of Statistics. Table 8. Gross Domestic Product by Industrial Origin at Constant Market Prices. 1990-2001 /a (Rp. billion) 1983 base 1993 base 1990 1991 1992 1993 I 1993 1994 1995 1996 1997 1998 1999* 2000* 2001** Jan-Jun I Aericulture. Livestock 22,357 22,715 24.226 24.569 j 58X963 59.291 61 885 64468 63.610 65.339 66432 34.207 Forestry and Fishery a. Farm food crops 13,558 13,484 14,527 14,356 32,093 31,408 32,952 33,647 32,688 33,350 33,971 34,302 18,745 b. Non-food crops/b 3,724 3,924 4,111 4,351 i 9,015 9,472 9,912 10,355 10,497 10,502 10,741 10,909 4,708 c. Livestock products 2,328 2,468 2,665 2,814 j 6,203 6,451 6,790 7,133 7,483 6,440 6,869 7,060 3,664 d. Forestry 1,003 1,003 980 997 | 6,268 6,301 6,304 6,444 7,190 6,581 6,299 6,411 3,301 e. Fishery 1,745 1,835 1,943 2,053 i 5,385 5,660 5,928 6,249 6,610 6,737 7,460 7,750 3,789 2. Mininr & Ouarrying 17.532 19.317 18.958 19370 i 31A497 33.262 35,502 37.739 38538 37473 36572 37A423 18.801 a. Oil & natural gas 16,030 17,513 16,719 16,667 23,121 23,720 23,720 24,063 23,920 23,340 22,137 22,230 10,661 b. Oth. mining & quanrying 1,502 1,804 2,239 2,704 8,377 9,542 11,782 13,677 14,619 14,133 14,435 15,193 8,140 3. Manufacturine 22337 24.585 26i964 29A4 j 73.556 82.649 91.637 102.260 107,630 95321 98,49 105,085 53,789 a Refinery oil 1,094 1,137 1,202 1,187 5,541 5,548 5,392 6,291 5,926 6,310 6,607 7,069 3,642 b. LNG 4,093 4,433 4,663 4,753 1 4,253 4,721 4,390 4,572 4,725 4,732 5,082 4,503 2,208 c. Non-oil & gas mfg. 17,150 19,015 21,099 23,544 63,763 72,380 81,855 91,396 96,980 84,278 87,261 93,513 47,939 4 Electricity. eas & water 726 843 928 1.022 3.290 3.703 4.292 4J877 5,480 5.646 6.113 6,649 3.495 5. Construction 6.673 7A424 8.224 9.223 22513 25.858 29.198 32924 35346 22,465 22.286 23.789 11929 6. Trade, Hotels & Restaurants 18.569 19.576 21.009 55.298 59.504 64.231 69A75 73.524 60.131 60.195 63.621 32.999 a. Retail & wholesale trade 15,425 16,214 17,406 18,969 j 44,605 47,620 51,397 55,514 58,842 47,846 47,694 50,457 26,207 b. Hotels&Restaurants 3,143 3,363 3,603 3,881 j 10,693 11,885 12,834 13,962 14,682 12,285 12,501 13,165 6,792 7. Transport & Communications 6368 6.869 7.555 8302 23.249 25.189 27329 29,701 31.783 26.975 26,772 29284 15311 a. Transport 5,596 6,003 6,601 7,192 j 20,101 21,400 22,932 24,445 25,609 20,504 19,738 21,431 11,097 b. Communications 772 867 954 1,110 j 3,148 3,788 4,397 5,257 6,174 6,471 7,035 7,854 4,214 8. Banks & Finance 4.894 5.535 6.256 7.070 j 14,005 15.945 18.109 188 19.956 13.173 11.765 12.403 6384 9. Ownership of Dwellines /c 2999 3.120 3.249 3.411 j 9695 10.087 10.643 11.266 11,826 9.476 8.906 9.205 4.611 10. Other Services 12,764 13.242 I1 14A05 37.709 39.155 40W967 4242 44,69 42,105 42661 22.163 a. Public 8,783 9,052 9,320 9,509 22,458 22,752 23,046 23,338 23,617 21,888 22,251 22,555 11,307 b. Other Private & Services /d 3,981 4,189 4,497 4,897 15,251 16,403 17,921 19,503 21,079 20,218 20,410 21,220 10,855 Gross Domestic Products 115.217 12.5 131.185 139,707 i329.776 354.641 383.792 413798 433246 376374 379558 397.666 203.68 *: Preliminary figures. ** Very preliminary figures. /a. In 1996, the Government released national accounts series using the 1993 base. /b. Includes the former smallholder and estate food crops under the National Accounts with a 1983 base. /c. Using the 1983 base, this line refers only to Ownership of Dwellings. Using the new base, it includes Real Estates. /d. Includes Business Services. Source: Central Bureau of Statistics. Table 9. Gross Domestic Product by Exvenditure Categorv at Current Market Prices. 1990-2001 /a (Rp. billion) 1983 base 1993 base 1990 1991 1992 1993 1993 1994 1995 1996 1997 1998 1999* 2000* 2001** |________________________________________________________________________ Jan-Jun 1. Privateconsumption 106,312 125,036 135,880 158,342 1 192,959 228,119 279,876 332,094 387,171 647,824 813,183 867,997 477,184 2. Government consumption 17,573 20,785 24,731 29,757 I 29,757 31,014 35,584 40,299 42,952 54,416 72,631 90,780 50,199 3. Gross fixed investment 55,633 63,894 70,820 78,243 86,667 105,381 129,218 157,653 177,686 243,043 240,322 313,915 189,451 4. Changes in stock/b 15,072 16,848 22,405 28,286 | 10,546 13,327 15,900 5,800 21,615 -82,716 -105,063 -83,319 -49,116 5. Exports of goods and nonfactorservices 51,953 62,264 76,384 85,454 88,231 101,332 119,593 137,533 174,871 506,245 390,560 497,519 318,791 6. Less: Imports of goods and nonfactor services 50,946 61,376 70,337 78,065 1 78,383 96,953 125,657 140,812 176,600 413,058 301,654 396,208 270,250 Gross Domestic Product 195.597 227A450 259.885 302,018 329.776 382,220 454,514 532.568 627.695 955,754 1,109.980 1.290.684 716,258 * : Preliminary figures. ** : Very preliminary figures. /a. In 1996, the Government released national accounts series using the 1993 base, based on an up-date of the 1990 Input-Output Table and refined estimates of some sub-sectors. /b. Residuals. Source: Central Bureau of Statistics. Table 10. Gross Domestic Product by Expenditure Cateeory at Constant Market Prices, 1990-2001 /a (Rp. billion) 1983 base 1993 base 1990 1991 1992 1993 1993 1994 1995 1996 1997 1998 1999* 2000* 2001** Jan-Jun 1. Private consumption 62,053 66,584 68,485 72,476 ! 192,958 208,062 215,798 257,016 277,116 260,023 272,070 281,957 146,741 2. Governmentconsumption 11,317 12,113 12,819 12,830 1 29,757 30,443 31,476 31,681 31,701 26,828 27,014 28,768 15,199 3. Gross fixed investment 32,732 34,867 36,589 38,671 86,667 98,589 114,022 128,699 139,726 93,605 75,468 88,985 50,622 4. Changes in stock /b 3,303 1,990 2,314 3,404 I 10,546 14,836 23,435 5,873 3,342 -6,387 -8,572 -16,138 -13,400 5. Exports of goods and nonfactor services 28,863 34,600 39,675 42,297 88,231 97,002 102,975 112,391 121,158 134,707 92,124 106,918 59,851 6. Less: Imports of goods and nonfactor services 23,050 26,929 28,697 29,971 78,383 94,291 103,938 121,863 139,796 132,401 78,546 92,823 55,325 Gross Domestic Product 115.217 123.225 131,185 139,707 1 329.776 354.641 383.768 413.798 433.246 376375 379.558 397.666 203689 * Preliminary figures. **: Very preliminary figures. /a. In 1996, the Govermnent released national accounts series using the 1993 base, based on an update of the 1990 Input-Output Table and refined estimates of some sub-sectors. /b. Residuals. Source: Central Bureau of Statistics. Table 11. Balance of Payments, 1994-2001 (US$ million) Items 1994 1995 1996 1997 1998 1999 2000 2001/c I Non oil/gas, merch. (net) 1,595 -96 -1,849 3,129 13,864 14,355 15,963 14,470 2 Oil, merch. (net) 2,329 2,851 3,122 2,266 1,518 1,975 2,197 2,205 3 Gas, merch. (net) 2,755 6,644 5,896 4,679 3,047 4,314 6,881 5,329 4 Current account -2,960 -6,760 -7,801 -5,001 4,097 5,783 7,998 4,249 a. Exports, fob 40,223 47,454 50,188 56,297 50,371 51,243 65,408 62,113 b. Imports, fob -32,322 40,921 -44,240 46,223 -31,942 -30,599 40,367 40,109 c. Services, net -10,861 -13,293 -13,749 -15,075 -14,332 -14,861 -17,043 -17,755 5 Official Capital 307 336 -522 2,880 9,971 5,353 3,217 1,528 a. Inflows 5,838 5,785 5,693 7,594 7,414 6,560 3,862 4,055 IGGI 3,908 5,635 5,093 7,594 5,897 6,560 3,862 4,055 Special assistance 268 226 165 92 0 0 0 0 Program aid 0 0 0 3,036 1,821 3,870 1,360 1,580 Food aid 0 0 0 0 160 273 76 0 Project aid 3,640 5,409 4,928 4,466 3,916 2,417 2,426 2,475 ODA 2,493 3,591 3,274 2,601 1,718 1,686 2,193 2,110 Non-ODA 1,147 1,818 1,654 1,865 2,198 731 233 364 Commercial loan 141 150 600 0 1,517 0 0 0 b. Amortization -5,390 -5,449 -6,215 4,714 -3,765 -4,070 4,272 4,892 c. Exceptional financing 0 0 0 3,036 6,322 2,863 3,627 2,365 IMFPurchases/a 0 0 0 3,036 5,761 1,373 1,124 1,009 IMF Repurchases 0 0 0 0 561 0 0 -1,502 Rescheduling 0 0 0 0 0 1,490 2,503 2,858 6 Private Capital 3,701 10,252 11,511 -338 -13,846 -9,923 -9,992 -9,516 a. Foreign direct invesment 2,108 4,345 6,194 4,677 -356 -2,745 4,549 -5,347 Inflow 3,412 5,975 8,154 10,005 6,986 3,702 2,974 2,824 Outflow -1,304 -1,630 -1,960 -5,328 -7,342 -6,447 -7,523 -8,171 b. Others 1,593 5,907 5,317 -5,015 -13,490 -7,178 -5,443 -4,169 7 Capital account (5+6) 4,008 10,588 10,989 2,542 -3,875 4,570 -6,775 -7,988 8 TOTAL(4+ 8) 1,048 3,828 3,188 -2,459 222 1,213 1,223 -3,739 9 Errors & omissions, net -(8+10) -242 -2,312 1,263 -1,986 2,122 2,079 3,820 589 10 Monetary movements/b -806 -1,516 4,451 4,445 -7,254 -3,292 -5,043 3,150 /a Including Japanese new financing. /b Since 1998 Monetary Movement is based on Gross Foreign Assets (GFA) replacing Official Reserves. Since 2000, based on change reserve assets replacing GFA. Negative represents surplus and Positive represents deficit. /c Projections Table 12. Selected Non-oil Exports. 1990-2001 (US$ million) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Jan-Jun 1. Rubber 885 924 1,039 959 1,268 1,986 1,894 1,505 1,010 855 881 628 2. Coffee 372 355 236 333 750 622 598 583 607 474 334 74 3. Palm oil & Cemel 253 335 465 535 878 973 1,017 1,662 816 1,170 1,195 459 4. Rattan 275 275 307 333 354 374 324 204 37 255 296 144 5. Foodstuff 308 382 467 455 603 670 747 881 923 904 718 348 6. Shrimps, Lobster, Tuna 705 811 802 902 1,056 1,093 1,058 1,097 1,768 1,607 1,672 743 7. Tin 176 146 148 92 121 240 310 277 260 242 234 112 8. Copper 400 146 687 646 879 1,551 1,397 1,548 1,749 1,077 1,854 1,282 9. Nickel 319 512 269 304 334 410 374 233 165 219 360 186 10. Aluminum 216 304 214 165 204 354 320 280 200 135 248 129 11. Iron Steel 367 172 381 464 454 522 608 660 990 772 805 3,445 12. Plywood 2,690 2,772 3,219 4,128 3,650 3,452 3,544 3,477 2,327 2,254 1,995 881 13. Textiles 1,084 2,772 2,470 2,311 2,517 2,908 2,683 3,390 3,461 3,086 3,540 1,509 14. Handicraft 346 1,539 541 663 978 655 526 1,027 2,089 612 617 309 15. Electrical app. 237 379 1,017 1,301 1,774 2,724 3,593 3,261 2,813 3,401 6,369 3,232 16. Garment 1,570 2,203 3,212 3,395 3,096 3,324 3,187 4,181 3,817 3,777 4,581 1,974 17. Pulp and Paper 250 312 401 483 782 1,504 1,369 1,953 2,469 2,646 3,042 1,103 Others 4,305 3,716 7,748 8,612 10,172 12,854 13,499 16,914 16,358 16,022 19,743 5,818 Total Non-oil Exports/a 14,758 18.054 23.624 26,080 29,870 36.214 37_046 43.133 41.859 39.510 48.483 22,376 /a Exclude exports from Batam. Source: Bank Indonesia. Table 13. Value of Exports by Principal Country of Destination. 1990-2001 (US$ million) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Jan-May Asean 2.543 3.197 4[361 4.997 5.981 6.476 7.689 9.258 9,347 8.278 10,883 3.983 Malaysia 253 342 488 586 738 987 1,110 1,506 1,359 1,336 1,972 722 Thailand 189 267 353 468 401 703 823 847 943 813 1,026 440 Philippines 161 168 181 285 365 590 689 793 708 695 820 331 Singapore 1,902 2,410 3,314 3,372 4,150 3,767 4,565 5,462 5,718 4,931 6,562 2,280 Brunei 11 10 25 35 50 24 27 40 36 28 25 8 Vietnam 27 141 165 172 196 264 337 390 351 332 361 143 Cambodia /a - - - 40 44 80 60 70 65 69 52 28 Laos/a - - 0 1 1 1 1 2 2 1 0 Myanmar /a - - - 40 35 60 78 150 167 74 65 30 Hong Kong 618 703 881 901 1,321 1,657 1,625 1,778 1,865 1,330 1,554 590 Japan 10,923 10,767 10,761 11,172 10,929 12,288 12,885 12,461 9,116 10,397 14,415 5,874 Other Asia 6,728 7,368 8,664 9,475 10,593 9,244 10,138 13,352 5,206 Africa 199 394 419 463 638 621 639 771 908 1,063 1,099 496 USA 3,365 3,509 4,419 5,230 5,829 6,322 6,795 7,113 7,031 6,896 8,476 3,408 Canada 139 172 289 304 322 359 368 398 412 354 404 170 Other America 102 184 328 469 562 759 758 950 927 830 1,075 408 Australia 403 628 746 774 705 915 1,216 1,511 1,533 1,485 1,520 666 Other Oceania 84 39 53 78 67 156 71 69 121 142 175 97 EEC 3.029 3.743 4.844 5.391 5.948 6,760 7.724 8.056 7.766 7.085 8.665 3.367 o/w UnitedKingdom 517 654 844 1,005 1,038 1,129 1,193 1,231 1,143 1,176 1,508 584 Netherlands 723 838 1,100 1,086 1,324 1,452 1,667 1,835 1,512 1,544 1,838 630 Germany 750 907 978 1,178 1,263 1,382 1,489 1,459 1,401 1,234 1,443 585 Belgium&Luxemburg 210 258 401 366 409 539 682 788 877 695 837 339 France 286 386 495 500 426 520 564 497 547 503 718 285 Italy 276 382 583 615 661 784 744 823 859 656 758 277 Spain 152 169 255 333 454 535 813 886 869 742 932 398 Others in Europe 264 269 301 316 385 441 571 485 578 667 508 237 Totai 21,669 23,605 27,402 36,824 40,054 45,418 49,815 53,443 48,848 48,665 62,124 24,503 /a Before 1993 these countries trade data are included in 'other Asia' Table 14. Value of Imptorts by Princiiwl Country of Oripin. 1990-2001 (US$ million) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Jan-May Asean 2,430 2.465 2.593 2.659 3,044 4.219 5.124 5 413 4.0 784 6. 2.326 Malaysia 326 407 525 517 579 767 824 865 627 606 1,129 390 Thailand 183 278 345 235 406 737 1,095 867 842 933 1,109 519 Philppines 649 81 52 57 65 81 90 127 65 56 115 47 Singapore 1,272 1,699 1,670 1,793 1,877 2,368 2,875 3,411 2,543 2,526 3,789 1,280 Brunei 0 0 1 1 0 1 1 6 0 38 17 0 Vietnam 43 87 93 38 79 156 204 117 421 605 303 79 Cambodia /a - - - I 1 4 3 0 0 1 1 0 Laos/a -0 0 0 0 1 0 0 1 0 Myanmar/a - - - 15 37 105 33 19 9 19 22 11 Hong Kong 273 232 229 247 241 275 262 325 264 228 342 131 Japan 5,300 6,327 6,014 6,248 7,740 9,217 8,504 8,252 4,292 2,913 5,397 2,370 OtberAsia 4,633 5,156 5,496 6,014 6,750 8,111 8,423 8,035 5,033 5,952 9,196 4,191 Africa 170 195 213 140 332 608 643 684 430 573 825 590 USA 2,520 3.397 3,822 3,255 3,588 4,756 5,060 5,441 3,517 2,839 3,390 1,702 Canada 407 354 459 410 497 811 786 682 504 421 638 198 Other America 519 597 488 625 755 1,088 1,089 927 515 584 597 215 Australa 1,186 1,378 1,413 1,399 1,542 2,016 2,535 2,427 1,761 1,460 1,694 968 Other Oceania 115 118 136 161 184 206 245 234 166 117 265 130 EEC 4.060 4.705 5.400 6.651 6 612 8 175 9.234 8.333 5.866 3.801 4,163 1.965 o/%UnitedKingdom 440 603 719 782 710 902 1,118 1,084 920 511 557 334 Netherlands 550 505 507 626 564 842 493 566 338 347 434 174 Germany 1,502 2,061 2,141 2,072 2,473 2,819 3,001 2,629 2,366 1,399 1,245 597 Belgium&Luxemburg 232 254 324 340 292 401 394 340 277 178 239 114 France 643 544 816 853 786 1,064 1,006 1,017 568 372 400 176 Denmark 61 49 124 158 106 105 191 159 50 38 44 26 Ireland 74 13 23 21 22 41 39 35 26 31 66 21 Italy 410 536 558 523 670 791 1,212 918 480 277 345 196 Greece 6 5 8 12 26 61 76 52 19 25 15 7 Portugal 6 4 2 2 4 8 5 23 2 2 2 1 Spain 136 131 178 262 174 219 345 370 160 206 185 97 Others in Europe 764 899 969 519 700 1,148 1,025 927 483 332 522 257 Total 22,430 25,871 27,279 28,328 31,984 40,629 42,929 41,679 27,337 24,003 33,515 15,042 /a Before 1993 these countries trade data are included in other Asia' Source: Central Bureau of Statistics. Table 15. External Public Debt Outstandingi ncluding Undisbursed as of December 31, 2000 (US$ thousand) Type of creditor/ Debt outstanding Present creditor country Disbursed Undisbursed Total Value PUBLIC AND PUBLICLY GUARANTEED DEBT Bilateral Loans Australia 739,793 28,730 768,523 507,206 Austria 243,622 59,495 303,117 187,556 Belgium 129,211 2,548 131,759 100,808 Brunei 82,262 0 82,262 40,874 Canada 423,558 24,259 447,817 273,997 China 18,846 4,444 23,290 14,409 Demnark 39,944 0 39,944 30,599 Finland 12,510 4,116 16,626 10,649 France 698,203 37,037 735,240 460,839 Germany, Fed. Rep. of 2,650,653 196,566 2,847,219 2,008,262 Italy 176,367 0 176,367 123,074 Japan 22,517,675 5,606,320 28,123,996 21,755,874 Korea, Republic of 80,476 4,771 85,246 65,787 Kuwait 51,369 15,546 66,915 40,377 Multiple Lenders 3,632,714 0 3,632,714 3,049,266 Netherlands 599,335 14,239 613,574 416,504 New Zealand 4 0 4 0 Norway 30,060 0 30,060 22,170 Other 20,366 0 20,366 14,985 Saudi Arabia 23,823 0 23,823 13,306 Singapore 1,194 0 1,194 1,146 Slovak Republic 3,421 0 3,421 3,362 Spain 339,554 61,694 401,248 224,122 Sweden 11,606 0 11,606 10,704 Switzerland 151,083 0 151,083 132,769 United Kingdom 24,794 395 25,190 25,570 United States 2,495,755 107,106 2,602,861 1,874,179 Total Bilatera Loans 35,198,198 6,167,267 41,365,464 31,408,393 Bonds Multiple Lenders 545,000 0 545,000 541,317 United States 426,000 0 426,000 435,507 Total Bonds 971,000 0 971,000 976,824 Exoott Credits Austria 660,963 14,543 675,506 559,774 Belgium 136,572 266 136,837 107,222 Denmark 37,569 0 37,569 28,191 Fmiland 42,026 0 42,026 32,450 France 665,608 20,873 686,480 483,804 Germany, Fed. Rep. of 14,734 0 14,734 8,053 Japan 38,977 0 38,977 36,796 Netherlands 227,140 0 227,140 180,979 Norway 44,005 0 44,005 30,333 Spain 50,806 0 50,806 36,621 Sweden 22,213 0 22,213 11,634 Switzerland 266,396 0 266,396 198,062 United Kingdom 549,336 62,467 611,803 397,168 United States 245,220 0 245,220 178,812 Total Export Credits 3,001,564 98,149 3,099,712 2,289,898 Continued Table 15. External Public Debt Outstandine includine Undisbursed as of December 31. 2000 (US$ thousand) Type of creditor/ Debt outstanding Present creditor country Disbursed Undisbursed Total Value Financial Institutions Australia 2,243 0 2,243 674 Austria 147,493 15,585 163,078 120,982 Belgium 2,228 461 2,689 1,946 France 176,095 39,071 215,166 148,535 Germany, Fed. Rep. of 2,020 79 2,098 1,780 Hong Kong 461,518 133,457 594,975 457,413 Japan 147,272 1,270 148,542 145,847 Multiple Lenders 6,885,475 0 6,885,475 6,843,055 Netherlands 59,966 8,076 68,042 50,744 Norway 40,595 8,544 49,139 27,526 Singapore 1,162,292 466,976 1,629,268 1,011,527 Spain 4,199 0 4,199 2,741 Switzerland 2,139 0 2,139 1,601 United Kingdom 389,484 37,862 427,346 269,024 Total Financial Institutions 9,483,019 711,379 10,194,398 9,083,395 Multilateral Loans ASDB "soft window" 648,714 150,525 799,239 353,831 Asian Dev. Bank 6,355,420 2,552,275 8,907,695 6,173,208 EEC 3,647 0 3,647 2,135 European Dev. Fund 1,236 393 1,628 971 IBRD 11,714,727 1,866,538 13,581,265 12,709,832 IDA 713,566 178,938 892,504 399,751 Intl. Fund Agr. (IFAD) 101,538 14,397 115,936 84,212 Islamic Dev. Bank 83,680 13,948 97,627 85,356 Nordic Invest. Bank 170,604 8,370 178,974 160,042 Nordic Investment Fund 11,301 0 11,301 10,237 Total Multilateral Loans 19,804,432 4,785,383 24,589,816 19,979,576 Nationalization Netherlands 15,876 0 15,876 14,723 Total Nationalization 15,876 0 15,876 14,723 Supplier Credits France 0 2,624 2,624 0 Japan 834,985 1,431 836,416 742,295 Singapore 0 6,246 6,246 1 Slovak Republic 0 10,413 10,413 0 United States 0 18,465 18,465 19 Total Supplier Credits 834,985 39,179 874,164 742,315 Creditor Tvoes Bilateral Loans 35,198,198 6,167,267 41,365,464 31,408,393 Bonds 971,000 0 971,000 976,824 Export Credits 3,001,564 98,149 3,099,712 2,289,898 Financial Institutions 9,483,019 711,379 10,194,398 9,083,395 Multilateral Loans 19,804,432 4,785,383 24,589,816 19,979,576 Nationalization 15,876 0 15,876 14,723 Supplier Credits 834,985 39,179 874,164 742,315 Total 69,309,074 11,801,357 81,110,432 64,495,124 Notes: (1) Only debts with an original or extended maturity of over one year are included in this table . (2) Debt outstanding includes principal in arrears but excludes interest in arrears . Source: IBRD Debtor Reporting System, based on data provided by Bank Indonesia. Table 16. Service Payments. Co mItments, Disbursements and Outstandine Amounts of Total External Debt, 1920-2013 /a (USS thousand) Debt outstanding at Transactiom during period Other Changes end of period Disbaursed Including Commnit- Disburse- Service Payn-ents Cancel- Adjust- only Undisbursed ments tntets Principal Interest Total hations ment /b Actual 1980 20,937,697 30,420,359 4,277,373 3,245,505 1,632,494 1,451,811 3,084,305 118,261 0 1981 22.761,139 33,805,826 5,008,002 3,845,429 1,784,995 1,707,127 3,492,122 163,286 325,746 1982 25,133,280 38,847,056 7,067,267 4,410,336 1,942,084 1,914,070 3,856,154 5,472 -78,481 1983 30,229,384 44,069,191 5,686,879 6,392,696 1,798,027 1,943,231 3,741,258 197,669 1,530,951 1984 32,025,604 46,152,969 4,816,038 4,840,324 2,270,173 2,575,904 4,846,078 26,707 -435,380 1985 36,715,241 52,664,318 4,583,947 4,170,204 3,421,579 2,401,135 5.822,715 514,815 5,863,797 1986 42,916,426 60,291,414 4,104,406 4,829,475 3,285,237 2,698,511 5,983,748 184,999 6,992,926 1987 52,535,204 71,997,352 5,994,820 7,489,770 4.059,579 2,941,855 7.001,434 635,419 10,406,115 1988 54,078,473 72,944,387 6,087,327 8,179,570 5,296,940 3,345,242 8,642,182 511,210 667,858 1989 59,401,728 78,040,191 7,643,407 9,008,916 5,993,871 3,839,209 9,833,079 307,264 3,753,532 1990 69,871,535 90,281,275 6,691,047 10,024,229 5,968,647 3,977,615 9,946,262 792,119 12,310,802 1991 79,547,725 100,178,464 8,811,427 11,758,429 6,857,771 4,617,488 11,475,258 2,102,942 10,046,476 1992 88,002,159 107,367,183 7,878,074 13,532,913 7,943,980 4,512,662 12,456,641 1,212,380 8,467,005 1993 89,171,879 109,869,371 8,136,637 8,084,176 9,137,539 4,951,220 14,088,759 428,180 3,931,270 1994 107,823,935 129,207,339 7,711,610 12,546,541 8,951,065 5,316,014 14,267,079 402,304 20,979,726 1995 124,398,325 149,421,280 10,954,145 13,628,469 10,196,992 6,219,010 16,416,001 568,988 20,021,412 1996 128,936,704 152,638,402 7,795,728 20,973,217 14,895,938 6,647,014 21,542,952 558,371 10,882,672 1997 136,160,846 155,516,175 3,424,551 22,453,960 13,010,479 6,726,343 19,736,821 451,022 12,928,863 1998 151,235,672 167,630,856 7,375,001 16,391,639 11,202,473 7,107,267 18,309,740 3,220,311 19,156,417 1999 150,990,499 166,504,501 5,233,619 9,460,136 11,710,701 5,953,972 17,664,673 639,680 5,977,364 2000 141,951,256 153,752,614 1,903,316 7,059,446 11,295,880 7,378,724 18,674,604 1,346,681 -1,996,847 Projected 2001 128,240,716 134,858,643 0 5,049,558 15,941,595 6,312,278 22,253,873 0 -2,952,375 2002 116,118,867 119,379,584 0 3,357,211 15,581,834 5,458,507 21,040,341 0 102,775 2003 104,850,709 106,526,585 0 1,584,856 12,853,014 4,582,148 17,435,162 0 0 2004 95,348,794 96.148,939 0 875,742 10,377,657 3,934,340 14,311,997 0 0 2005 85,347,163 85,703,515 0 443,824 10,445,455 3,398,276 13,843,731 0 0 2006 76,690,045 76,816,838 0 229,584 8,886,830 2,777,136 11,663,965 0 0 2007 67,298,729 67,305,816 0 119,762 9,511,143 2,302,520 11,813,663 0 0 2008 58,482,417 58,484,981 0 4,526 8,820,837 1,772,500 10,593,337 0 0 2009 53,705,441 53,706,198 0 1,807 4,778,783 1,402,660 6,181,443 0 0 2010 49,072,238 49,072,478 0 516 4,633,719 1,152,291 5,786,010 0 0 2011 45,728,848 45,729,070 0 0 3,343,388 936,104 4,279,492 0 0 2012 42,262,734 42,262,956 0 0 3,466,114 786,709 4,252,823 0 0 2013 39,395,567 39,395,789 0 0 2,867,167 617,422 3,484,589 0 0 2014 36,837,464 36,837,685 0 0 2.558,104 499,316 3,057,420 0 0 / Tota external debt includes total amount of public, private, short termn and IMP credit only debt. /b This column shows the amnoeunt of arithmetic imbalances in the amount outstanding, including undisburred, from one year to the nest. The most tomnuon causes of imbalance are changes in exchange rates and transfers of debts from one category to another in the tabk. Source: IBRD Debtor Reporting System, based on data provided by Bank Indonesia. Table 17. External Debt Outstanding December 1997-June 2001 (US$ million) 1997 1998 1999 2000 2001 December March June September December March June September December March June September December March June External Debt 125,817 131,587 135,005 136,299 145,599 146,448 141,296 142,764 144,798 140,725 141,587 138,394 139,496 136,486 135,151 Government /a 53,865 54,159 55,166 58,666 67,315 68,404 70,418 74,809 75,720 75,036 76,356 75,304 74,891 72,324 70,665 ODA 38,162 37,853 38,672 40,803 48,421 49,788 52,091 55,445 56,453 56,316 57,179 56,620 56,152 53,756 53,100 Non ODA 14,812 14,632 14,164 15,485 16,045 16,247 15,952 16,982 16,880 16,336 16,794 16,307 16,342 16,225 15,576 Conmnercial 890 1,674 2,330 2,378 2,849 2,369 2,375 2,382 2,387 2,384 2,383 2,377 2,397 2,343 1,989 State Enterprises 3,995 3,842 4,008 3,850 4,153 4,123 4,121 4,020 5,004 4,937 5,126 5,114 5,083 5,002 4,837 Pertanina & Garuda 3,757 3,720 3,829 3,688 3,992 3,980 3,948 3,820 3,667 3,639 3,597 3,576 3,583 3,490 3,438 Other state enterprises 239 122 179 162 161 143 173 200 1,337 1,298 1,529 1,537 1,500 1,512 1,399 Banks /b 14,364 12,826 12,622 10,817 10,769 11,748 10,631 10,384 10,836 10,379 10,314 9,387 7,718 7,848 7,684 Statebanks 5,910 5,024 4,967 4,360 4,744 4,872 4,926 4,732 4,705 4,667 4,733 4,399 4,150 4,154 4,118 Private banks 8,454 7,802 7,655 6,457 6,025 6,876 5,705 5,652 6,131 5,712 5,581 4,988 3,568 3,694 3,566 Private non Banks /b 53,593 60,760 63,209 62,966 63,362 62,173 56,126 53,551 53,238 50,373 49,791 48,589 51,805 51,312 51,965 Loan 49,179 52,628 55,584 55,376 55,954 54,718 49,161 46,902 46,909 44,134 43,666 42,708 46,333 46,163 47,068 Bonds 4,414 8,132 7,625 7,590 7,408 7,455 6,965 6,649 6,329 6,239 6,125 5,881 5,472 5,149 4,897 Domestic Securities Owned by non-residents 10,271 6,432 5,607 5,667 5,287 3,491 3,653 3,178 3,299 3,559 2,577 2,398 2,197 2,089 3,646 Denomiinated in Rupiah 2,858 1,187 740 724 656 422 795 399 589 710 434 363 184 158 1,875 Bonds 322 170 102 98 99 56 96 72 90 104 78 79 30 21 23 SBIs 245 229 248 182 13 30 275 38 142 256 132 102 26 11 15 MTNs 369 165 87 93 109 86 86 71 110 100 77 51 17 6 4 CPs 11 10 6 6 9 4 9 8 10 2 7 7 5 4 3 CDs 1,088 240 51 30 24 0 18 0 0 0 0 0 0 0 0 PNs 823 373 246 315 402 246 311 210 237 248 140 124 106 116 1,830 FRNs 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Denominated in USD 7,413 5,245 4,867 4,943 4,631 3,069 2,858 2,779 2,710 2,849 2,143 2,035 2,013 1,931 1,771 PNs 5,297 3,708 3,731 3,525 3,295 1,839 1,693 1,610 1,661 1,817 1,128 1,115 1,147 1,061 1,015 MTNs /c 1,974 1,365 1,069 1,343 1,263 1,184 1,106 1,115 1,004 992 991 901 842 848 734 CPs /c 29 43 44 49 50 35 42 39 35 30 17 17 17 17 17 Bonds 98 127 22 24 21 7 13 13 8 8 7 0 7 5 5 FRNs 2 2 1 2 2 4 4 2 2 2 0 2 0 0 0 CDs 13 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Total External Obligations 136,088 138,019 140,612 141,966 150,886 149,939 144,949 145,942 148,097 144,284 144,164 140,792 141,693 138,575 138,797 /a Includes debt owed to IMF. /b Includes loans obtained by branches of Indonesian banks and affiliates of Indonesian companies abroad and channeled into Indonesia. /c Including securides denominated in JPY. Source: Bank Indonesia. Table 18. Central Government Budget Summary, 1994/95-2002 /a (Rp. billion) Provision <--------------------------------------- Actual -----------------------------------------> Actual <------- Budget --------> 1994/95 1995/96 1996/97 1997/98 1998/99 1999/2000 2000 2001 /b 2002 9 months revision 1. Domestic revenues /c 64,412 70,852 87,630 107,965 146,872 204,422 194,146 286,006 301,874 2. Current expenditures 32,137 35,201 44,972 75,232 115,272 173,444 164,087 213,388 193,741 3. Government saving (1-2) 32276 35.651 42.658 32:733 31.600 30.978 30,059 72,618 108,133 4. Development expenditures 28,430 27,201 32,928 36,311 52,824 57,638 25,926 45,461 52,299 5 Balanced funds 0 0 0 0 0 0 33,894 81,477 97,969 /d 6 Pnmary Balance 10,316 15,325 19,632 13,157 11,349 15,628 23,568 35,250 46,365 7 Overal Balance (3-4-5) 34 8 iQ _7 21224 -29.761 -54.32 Financing (6+7) -8,461 -11,480 -1,100 1,636 22,403 45,633 29,761 52,530 42,135 8 Domestic 0 0 0 0 1,634 16,867 18,139 33,500 23,501 9 Foreign, net -8,461 -11,480 -1,100 1,636 20,769 28,766 11,622 19,030 18,634 Programloan 0 0 0 0 24,926 25,201 3,296 13,728 36,771 /e Project loan 9,838 9,009 11,900 14,386 26,181 24,383 16,389 22,265 25,830 Amortization -18,298 -20,489 -13,000 -12,750 -30,337 -20,818 -8,063 -16,963 -43,967 /a Government new format since 1999/2000 and applied it to 1994/95-1998/99. /b Budget revision April 2001 /c Including grants. /d Including Fund for Special Authonomy /e Including rescheduling. Source: Ministry of Finance. Table 19. Central Government Revenues. 1994/95-2002 /a (Rp. billion) Provision < ---------------------------------- Actual ------------------------------------- Actual <------- Budget --------> 1994/95 1995/96 1996/97 1997/98 1998/99 1999/2000 2000 2001 /b 2002 9 months revision State Revenues and Grants 64,412 70,852 87,630 107,965 146,872 204,422 194,146 286,006 301,874 I. Domestic Revenues 64,412 70,852 87,630 107,965 146,872 204,422 193,935 286,006 301,874 1. Tax Revenues 49,175 54,258 64,422 81,752 118,795 135,533 111,064 185,260 219,628 a. Domestic Taxes 45,144 51,042 61,762 78,625 111,860 130,497 104,610 174,255 207,029 i. Income Taxes 23,497 26,583 34,144 45,206 72,345 82,311 57,615 94,971 104,497 - Non-Oil & Gas 18,764 21,012 27,062 34,388 55,944 59,683 40,144 69,246 88,815 - Oil & Gas 4,733 5,571 7,082 10,818 16,401 22,628 17,472 25,725 15,682 ii. Sales tax (VAT) 16,545 18,519 20,351 25,199 27,803 33,087 31,525 53,457 70,100 iii. Property taxes 1,647 1,894 2,413 2,641 3,565 4,107 3,824 6,289 8,129 iv. Excises 3,153 3,593 4,263 5,101 7,733 10,381 10,632 17,501 22,353 v. Other taxes 302 453 591 478 413 611 1,014 1,938 1,950 b. International Trade Taxes 4,031 3,216 2,660 3,127 6,936 5,036 6,454 11,005 12,599 i. Import duties 3,900 3,029 2,579 2,999 2,306 4,177 6,116 10,398 12,249 ii.Export taxes 131 186 81 129 4,630 859 338 607 350 2. Non Tax Receipts 15,237 16,595 23,209 26,213 28,076 68,889 82,871 100,746 82,247 a. Natural Resources Revenues 8,804 10,483 13,055 15,431 15,431 35,854 70,186 79,446 63,195 i. Oil 7,603 9,093 11,235 10,701 10,701 28,898 44,892 57,867 44,013 ii. Gas 1,201 1,391 1,821 4,730 4,730 6,956 14,726 17,359 14,524 iii. Public Mining 0 0 0 0 0 0 620 928 1,340 iv. Forestry 0 0 0 0 0 0 9,923 3,001 3,026 v. Fishery 0 0 0 0 0 0 25 292 292 b. Profits of Public Enterprises 1,322 1,604 2,650 2,341 3,428 5,430 5,281 9,000 10,351 c. Other Non-tax revenues (PNBP) 5,111 4,508 7,503 8,442 9,217 27,605 7,403 12,300 8,700 H. Grants 0 0 0 0 0 0 211 0 0 /a Government new format since 1999/2000 and applied it to 1994/95 - 1998/99 /b Budget revision April 2001 Source: Ministry of Finance. Table 20. Central Governtment Expenditures. 1994/95-2002 /a (Rp. billion) Provision <--------------------------------------- Actual -----------------------------------------> Actual <------- Budget --------> 1994/95 1995/96 1996/97 1997/98 1998/99 1999/2000 2000 2001 /b 2002 9 months revision Total Expenditures 60,567 62,402 77,900 111,543 168,096 231,082 223,907 340,326 344,009 I. Current Expenditures 32.137 35,201 44,972 75.232 115_272 173,444 164.087 213388 193.741 Personnel expenditures 12,596 13,001 14,455 17,269 23,216 32,719 29,990 38,206 40,748 Material expenditures 4,319 5,175 8,109 8,999 9,862 10,765 9,047 9,909 12,863 Transfers to regions 7,272 8,227 9,358 11,061 13,074 17,485 0 0 0 Interest Payments 6,470 6,875 9,902 16,735 32,574 42,288 53,329 89,570 88,500 Domestic 0 0 0 0 8,385 22,230 34,770 61,174 59,525 External 6,470 6,875 9,902 16,735 24,189 20,058 18,559 28,395 28,975 Subsidies 687 0 1,416 20,413 33,872 65,916 59,725 66,269 41,586 Petroleum subsidies 687 0 1,416 9,814 28,607 40,923 51,135 53,774 30,377 Non-petroleum subsidies 0 0 0 10,599 5,265 24,993 8,590 12,495 11,209 Other Current Expenditures 793 1,923 1,733 756 2,674 4,271 11,996 9,433 10,043 Development Expenditures 28,430 27,201 32,928 36,311 52,824 57,638 25,926 45,461 52,299 1. RupiahFinancing 18,592 18,192 21,028 21,926 26,643 33,255 9,326 21,712 26,469 a. Capital transfer to region 5,670 5,488 6,472 7,512 13,575 12,451 0 0 0 b. Central government budget 12,922 12,704 14,556 14,414 13,068 20,804 9,326 21,712 26,469 2. Project financing with foreign loan 9,838 9,009 11,900 14,386 26,181 24,383 16,600 23,749 25,830 II. BalancedFunds 0 0 0 0 0 0 33,894 81,477 94,532 1. Revenue sharing funds 0 0 0 0 0 0 3,418 20,259 24,600 2. General allocation funds 0 0 0 0 0 0 30,476 60,517 69,114 3. Specialallocationfunds 0 0 0 0 0 0 0 701 817 m Fund for Special Authonomy 0 0 0 0 0 0 0 0 3,437 /a Government new format since 1999/2000 and applied it to 1994/95 - 1998/99 /b Budget revision April 2001 Source: Ministry of Finance. Table 21. Money Supply (Ml). 1999-2001 (Rp. billion) End of Period Total Currency Demand deposits Change over period Amount (%) Amount (%) Amount (%) 1991 1 23,570 9,026 38.3 14,544 61.7 1,415 6.4 11 24,609 8,824 35.9 15,785 64.1 1,404 6.1 III 25,805 9,025 35.0 16,780 65.0 2,823 12.3 IV 26,342 9,346 35.5 16,996 64.5 2,523 10.6 1992 1 27,318 11,025 40.4 16,293 59.6 3,748 15.9 II 26,844 9,944 37.0 16,900 63.0 2,235 9.1 III 27,626 10,440 37.8 17,186 62.2 1,821 7.1 IV 28,779 11,478 39.9 17,301 60.1 2,437 9.3 1993 1 30,592 12,324 40.3 18,268 59.7 3,274 12.0 11 31,563 12,386 39.2 19,177 60.8 4,719 17.6 III 35,041 13,106 37.4 21,935 62.6 7,415 26.8 IV 36,805 14,431 39.2 22,374 60.8 8,026 27.9 1994 1 37,908 15,340 40.5 22,568 59.5 7,316 23.9 11 39,886 15,825 39.7 24,061 60.3 8,323 26.4 III 42,195 17,555 41.6 24,640 58.4 7,154 20.4 IV 45,374 18,634 41.1 26,740 58.9 10,333 29.5 1995 1 44,908 18,902 42.1 26,006 57.9 7,000 18.5 II 47,045 19,186 40.8 27,859 59.2 7,159 17.9 III 48,981 19,564 39.9 29,417 60.1 6,786 16.1 IV 52,677 20,807 39.5 31,870 60.5 7,303 16.1 1996 1 53,162 21,121 39.7 32,041 60.3 8,254 18.4 11 56,448 21,271 37.7 35,177 62.3 9,403 20.0 HI 59,684 21,055 35.3 38,629 64.7 10,703 21.9 IV 64,089 22,487 35.1 41,602 64.9 11,412 21.7 1997 1 63,565 23,312 36.7 40,253 63.3 10,403 19.6 II 69,950 23,754 34.0 46,196 66.0 13,502 23.9 III 66,258 23,916 36.1 42,342 63.9 6,574 11.0 IV 78,343 28,424 36.3 49,919 63.7 14,254 22.2 1998 1 98,270 38,196 38.9 60,074 61.1 34,705 54.6 11 109,480 44,924 41.0 64,556 59.0 39,530 56.5 III 102,563 42,725 41.7 59,838 58.3 36,305 54.8 IV 101,197 41,394 40.9 59,803 59.1 22,854 29.2 1999 1 105,705 44,682 42.3 61,023 57.7 7,435 7.6 11 105,964 43,530 41.1 62,434 58.9 -3,516 -3.2 III 118,124 46,424 39.3 71,700 60.7 15,561 15.2 IV 124,633 58,353 46.8 66,280 53.2 23,436 23.2 2000 1 124,663 51,197 41.1 73,466 58.9 18,958 17.9 11 133,832 55,831 41.7 78,001 58.3 27,868 26.3 III 135,431 56,844 42.0 78,587 58.0 17,307 14.7 IV 162,186 72,371 44.6 89,815 55.4 37,553 30.1 2001 1 148,376 60,114 40.5 88,262 59.5 23,713 19.0 II 160,142 66,201 41.3 93,941 58.7 26,310 19.7 Source: Bank Indonesia. Table 22. Changes in Money SuIpply and Affecting Factors. 1990-2001 (Rp. billion) Public sector Claims Net claims on official Total change in broad Net on entities Claims on Net money supply (M2) End of foreign Central & public businesses & other Amount Percentage period assets Government enterprises individuals items (%) 1990 -2,171 -3,877 -921 35,809 -2,914 25,926 44.2 1991 7,499 -1,355 104 20,263 -12,083 14,428 17.0 1992 7,013 -1,292 492 15,257 -1,475 19,995 20.2 1993 -934 731 1,505 30,230 -5,383 26.149 22.0 1994 -4,428 -4,686 -485 37,845 1,064 29,310 20.1 1995 7,354 -7,472 1,305 47,504 -565 48,126 27.6 1996 18,015 -2,757 4,626 51,768 -5,658 65,994 29.6 1997 17,344 -16,486 5,031 132,031 -70,909 67,011 23.2 1998 73,692 17,513 6,389 93,032 31,112 221,738 62.3 1999 -12,581 425,287 /a -8,139 -291,550 -44,193 68,824 11.9 2000 81,637 123,060 -4,505 46,852 -143,096 100,823 16.4 2001 /b -30,440 357 -61 16,613 40,542 27,011 4.4 /a Includes effects of bank recapitalization /b January-August 2001 Source: Bank Indonesia. Table 23. Consolidated Balance Sheet of the Monetary System, 1990-2001 (Rp. billion) End of period 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 as of August Net foreign assets 16,122 23,621 30,634 29,700 25,272 32,626 50.641 67.985 141,677 129,096 210,733 180,23 Domestic credit 93,142 112.154 126.611 159.077 192,225 233.088 284.507 404,396 521,759 649.833 815240 832.148 Claims on public sector -4,322 -5,573 -6,373 -4,137 -8,834 -15,345 -15,694 -27,836 -3,505 416,119 534,674 534,970 Central government -12,202 -13,581 -14,873 -14,142 -18,828 -26,300 -29,057 -45,543 -28,037 397,257 520,317 520,674 Claims on public enterprises 7,904 8,008 8,500 10,005 9,994 10,955 13,363 17,707 24,532 18,862 14,357 14,296 Government-blocked account -24 0 0 0 0 0 0 0 0 0 0 0 Claims on private enterprises and individuals 97,464 117,727 132,984 163,214 201,059 248,433 300,201 432,232 525,264 233,714 280,566 297,179 Assets = liabilities 109,264 135,775 157,245 188,777 217,497 265,714 335,148 472,381 663,436 778,929 1,025,973 1,012,441 Import deosits 1.048 966 890 1,699 1,541 1.779 2.099 1.419 2.417 1.658 4.783 6.379 Net other items 23.586 35.751 37.302 41,876 41.444 41.297 46.635 118224 86.114 131.066 274,16 232.226 Mone and guasi money 84630 99.058 119053 145.202 174,512 222.638 288.632 355.643 577.381 646.205 747,028 774.037 Money 23,819 26,341 28,779 36,805 45,374 52,677 64,089 78,343 101,197 124,633 162,186 166,851 Currency 9,094 9,346 11,478 14,431 18,634 20,807 22,487 28,424 41,394 58,353 72,371 69,136 Demand deposits 14,725 16,995 17,301 22,374 26,740 31,870 41,602 49,919 59,803 66,280 89,815 97,715 Quasi money 60,811 72,717 90,274 108,397 129,138 169,961 224,543 277,300 476,184 521,572 584,842 607,186 Source: Bank Indonesia. Table 24. Bankine System Credits by Economic Sector. 1990-2001 /a (Rp. billion) 1990 1991 /e 1992 1993 /f 1994 1995 1996 1997 1998 1999 2000 2001/g Agriculture 7.176 8,465 10,281 12,057 13,860 15 525 17.630 26002 39,308 23.777 19,503 21.407 Inrupiah 6,884 7,979 9,173 10,368 12,026 13,661 15,158 20,340 29,430 21,139 15,028 16,223 In foreign exchange 292 486 1,108 1,689 1,834 1,864 2,472 5,662 9.878 2,638 4,475 5.184 Mininglb 615 743 762 777 799 913 1.693 5.316 5.909 3,697 6.680 4,159 In rupiah 570 614 605 416 359 434 716 2,769 2,729 879 2,879 2,558 Inforeignexchange 45 129 157 361 440 479 977 2,547 3,180 2,818 3,801 1,601 Manufacturing industry/c 30.502 33,131 37.458 51,432 60.211 72,088 78,850 111.679 171.668 84.259 106,782 112,780 Inrupiah 25,002 24,828 26,197 36,334 42,236 48,476 51,984 56,123 85,594 35,561 35,697 44,665 Inforeignexchange 5,500 8,303 11,261 15,098 17,975 23,612 26,866 55,556 86,074 48,698 71,085 68,115 Trade 29,737 33.049 32.944 37.794 44 372 54,224 70,586 82.264 96,364 43.288 44,099 45,743 In rupiah 27,267 28,842 28,100 31,470 36,840 43,608 55,763 57,471 59,830 29,687 30,601 35.535 Inforeignexchange 2,470 4,207 4,844 6,324 7,532 10,616 14,823 24,793 36,534 13,601 13,498 10,208 Service renderin industry d 17897 20,066 206 35,824 50.806 66584 91,655 113.569 139,124 43,161 44,316 46865 In rupiah 14,943 16,683 21,979 30,167 42,453 57,432 78,392 85,598 101,129 26,332 23,784 28,209 In foreign exchange 2,954 3,383 3,920 5,657 8,353 9,152 13,263 27,971 37,995 16,829 20,532 18,656 Others 11,769 17.371 15.574 12,38'7 1, 25,277 32,507 39.304 35.053 26.951 47.20 78,343 Inrupiah 11,197 16,326 14.653 12,374 18,824 25,265 32,478 39,233 34,406 26,929 44,493 54,752 In foreign exchange 572 1,045 921 13 8 12 29 71 647 22 3,127 23,591 iQLl 97696 112.825 122918 150.271 188880 234611 292921 378134 487.426 225,133 269. 309.297 Inrupiah 85,863 95,272 100,707 121,129 152,738 188,876 234,491 261,534 313,118 140,527 152,482 181,942 In foreign exchange 11,833 17,553 22,211 29,142 36,142 45,735 58,430 116,600 174,308 84,606 116,518 127,355 /a Credits outstanding at end of period. Includes investment credits, KIK and KMKP. Excludes interbank credits, credits to central government and to nonresider bridging finance credit, foreign exchange component of project aid, local cost of investment fund accounts, and credit extended to bank branches abroad. /b Includes credits to PERTAMINA for repayment of foreign borrowing. Ic Processing of agricultural products is classified under manufacturing industry according to ISIC 1968 /d Credits for electricity, gas and water supply are included in service rendering industry sector. le Since 1991 excludes Bank Indonesia /f As of 1993 includes Commnercial Ban'ks ex Non-Bank Financial Institutions. /g As of August 2001 Source: Bank Indonesia. Table 25. Bankinz Credits Ontstandina in Rupiab and Forei2n Exchanee by Group of Banks. 1990-2001/a (Rp. billion) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001/d BankIndonesiadirectcredits b 718 783 771 158 130 71 26 50 40 38 36 36 In rupiah 718 783 771 158 130 71 26 50 40 38 36 36 In foreign exchange 0 0 0 0 0 0 0 0 0 0 0 0 State banks 55.826 59.861 68.236 71,760 80.010 93.480 108.925 153,216 220,747 112,288 102,061 107,.187 Inrmpiah 50,648 52,628 58,133 59,738 68,085 79,394 93.051 113,436 160,113 84,038 68,489 75,446 In foreign exchange 5,178 7,233 10,103 11,805 11,925 14,086 15,874 39,830 60,634 28,250 33,572 31,741 Private national banks /c 34,975 44,452 45.352 63.995 90,50 116,886 156.412 176,262 199.931 62.805 92,531 112.763 In rupiah 31,458 39,467 39,685 55,076 76,506 99,466 130,194 135,475 139,155 46,047 66,281 84,821 In foreign exchange 3,517 4,985 5,667 8,919 13,998 17,420 26,218 40,787 60,776 16,758 26,250 27,942 Forein baniks 6,177 8,512 9,330 14,733 18.366 24.245 27584 48.606 66.748 50,040 74,408 67,940 In rupiah 3,039 3,177 2,889 6,315 8,147 10,016 11,245 12,623 13,850 10,442 17,712 21,675 Inforeignexchange 3,138 5,335 6,441 8,418 10,219 14,229 16,339 35,983 52,898 39,598 56,696 46,265 TotaL 97.696 113.608 123689 150.429 189.010 234.682 292947 378184 487.466 225171 269.036 287926 In rupiah 85,863 96,055 101,478 121,287 152,868 188,947 234.516 261,584 313,158 140,565 152,518 181,978 In foreignexchange 11,833 17,553 22,211 29,142 36,142 45,735 58,431 116,600 174,308 84,606 116,518 105,948 /a Credits outstanding at end of period. Includes investment credits. Excludes interbank credits, credits to Central Govemment and to non-residents, bridging finance credit, foreign exchange components of project aid, local cost of investment fund accounts and credits extended to bankd branches abroad. /b Excludes liquidity credits, includes credits to Pertamina for repayment for foreign borrowing. /c Includes regional gevemment banks. /d As of August 2001. Source: Bank Indoniesia. Table 26. Commercial Banks' Outstanding Investment Credits in Rupiab and Foreign Exchanee by Economic Sector, 1990-2001 (Rp. billion) End of period 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001/b Credits outstanding /a 20.734 25,748 35223 42.713 47.136 59.274 70443 100.735 141.464 57.691 65.256 78.099 Agriculture 4,520 5,450 7.050 8,730 9,865 10,564 11,737 14,629 17,250 11.615 10,810 13,084 Mining 373 459 459 310 196 256 405 1,321 2,029 1,329 2,884 3,022 Manufacturing industry 8,920 10,484 15,416 17,371 19,516 23,159 24,248 35,094 49,801 22,981 26,210 35,117 Trade 2,157 3,372 4,099 7,192 6,154 8,468 11,891 17,928 24,299 7,107 7,781 8,156 Service rendering industry 4,307 5,032 7,150 9,110 11,405 16,827 22,162 31,763 48,085 14,659 17,571 18,720 Others 457 951 1,049 0 0 0 0 0 0 0 0 0 /a Excludes Small Scale Investment Credits, investnment credits to the Central Government and to non resident, bridging finance credit, foreign exchange cornponents of project aid, and local cost of investment fund accounts and credit extended bank branches abroad. /b As of August 2001. Source: Bank Indonesia. Table 27. Commercial Banks' Outstandin! Funds in Rupiah and Foreien Exchanre by Group of Banks. 1990-2001 /a (Rp. billion) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 As of Aug Deposits State Banks 40,638 41,812 52,600 61,684 64,283 75,920 90,434 133,042 271,554 286,427 328,457 327,776 Private Banks 33,951 43,143 51,079 67,541 88,925 117,451 164,979 177,193 235,605 252,880 279,037 286,540 Regional Development Banks 2,550 3,228 3,697 4,773 6,183 7,812 8,522 8,796 10,932 14,017 19,896 33,469 Foreign Banks 6,016 6,935 7,474 8,681 11,015 13,581 17,783 38,582 55,433 72,294 92,989 85,153 Total 83.155 95118 114.850 142.679 170,406 214,764 281.718 357.613 573,524 625,618 720.379 732.938 Share in Total Deposits State Banks 48.9 44.0 45.8 43.2 37.7 35.4 32.1 37.2 47.3 45.8 45.6 44.7 Private Banks 40.8 45.4 44.5 47.3 52.2 54.7 58.6 49.5 41.1 40.4 38.7 39.1 Regional Development Banks 3.1 3.4 3.2 3.3 3.6 3.6 3.0 2.5 1.9 2.2 2.8 4.6 Foreign Banks 7.2 7.3 6.5 6.1 6.5 6.3 6.3 10.8 9.7 11.6 12.9 11.6 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Annual Growth Rate in Deposits StateBanks 36.7 2.9 25.8 17.3 4.2 18.1 19.1 47.1 104.1 5.5 14.7 1.1 Private Banks 72.7 27.1 18.4 32.2 31.7 32.1 40.5 7.4 33.0 7.3 10.3 1.1 Regional Development Banks 52.3 26.6 14.5 29.1 29.5 26.3 9.1 3.2 24.3 28.2 41.9 1.9 Foreign Banks 81.5 15.3 7.8 16.1 26.9 23.3 30.9 117.0 43.7 30.4 28.6 1.1 Total 52.9 14.4 20.7 24.2 19.4 26.0 31.2 26.9 60.4 9.1 15.1 1.1 /a Demand, time and savings deposits including non resident and central government accounts Source: Bank Indonesia. Table 28. Interest Rates, 1990-2001 (Percent per year) Time Deposits Year Interbank State bank Private national bank call money SBI 1 3 6 12 24 1 3 6 12 24 /a lb mo mos mos mos mos mo mos mos mos mos 1990 14.3 16.2 21.2 20.6 19.4 18.1 18.5 22.6 21.4 20.5 19.8 21.0 1991 14.7 19.3 20.0 21.3 22.3 22.5 21.0 21.8 22.6 23.3 23.4 18.6 1992 11.9 15.8 17.4 18.6 19.8 20.9 21.0 19.2 20.4 21.2 21.7 18.7 1993 8.4 10.4 11.2 10.8 14.3 15.7 18.5 14.8 15.8 16.6 17.1 17.4 1994 10.0 10.4 9.7 9.9 11.6 12.1 14.1 13.6 13.8 13.8 14.0 17.8 1995 13.8 14.2 14.4 13.9 14.8 13.9 14.0 17.4 17.4 17.2 16.0 16.2 1996 14.0 13.8 15.2 14.9 16.3 16.0 15.4 17.5 17.8 17.7 17.3 16.6 1997 29.2 14.7 17.7 17.9 15.3 15.5 15.4 22.0 21.0 17.4 17.2 16.9 1998 63.3 52.0 47.4 38.5 25.6 22.3 15.9 49.7 40.3 26.9 21.4 19.0 1999 23.6 23.4 23.3 25.8 25.2 27.8 17.2 23.7 25.9 24.6 25.4 21.8 2000 10.3 12.3 11.4 12.7 12.9 15.5 13.8 11.1 12.2 12.5 12.7 14.3 2001 /c 14.8 16.0 14.1 15.0 14.8 13.8 16.4 13.9 14.7 14.4 12.3 16.1 /a Average rate of ovemight interest rate on Interbank Call Money transactions recorded at the Jakarta Clearing House. /b Thirty days Bank Indonesia Certificate transactions. /c Average rate January - September 2001. Source: Bank Indonesia. Table 29. Principal Agricultural Products by Subsectors, 1990-2000 (thousand tons) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Food crops Paddy/a 45,179 44,689 48,240 48,181 46,641 49,744 51,101 49,377 49,200 50,855 51,899 Com 6,734 6,256 7,995 6,460 6,869 8,246 9,307 8,771 10,169 9,204 9,677 Cassava 15,830 15,954 16,516 17,285 15,729 15,441 17,002 15,134 14,696 16,459 16,089 Sweet potato 1,971 2,039 2,171 2,088 1,845 2,171 2,018 1,847 1,935 1,666 1,828 Soya beans (shelled) 1,487 1,555 1,870 1,709 1,565 1,680 1,517 1,357 1,306 1,383 1,018 Peanuts (shelled) 651 652 739 639 632 760 738 688 692 660 737 Fishery Saltwater fish 2,370 2,505 2,692 2,886 3,080 3,293 3,384 3,613 3,490 3,930 4,076 Freshwater fish 793 807 851 909 900 971 1,069 967 976 1,098 1,041 Cash crops Rubber 1,275 1,284 1,399 1,476 1,499 1,573 1,574 1,553 1,661 1,715 1,752 Coconut/copra 2,332 2,337 2,455 2,588 2,649 2,704 2,761 2,704 2,778 2,789 2,778 Coffee 413 419 437 439 450 458 459 428 514 511 495 Cloves 66 84 73 67 78 90 89 59 67 68 68 Tea 155 159 154 165 139 154 169 154 167 162 159 Sugar 2,119 2,253 2,307 2,329 2,454 2,077 2,160 2,187 1,929 1,907 2,093 Tobacco 156 161 112 121 130 140 151 210 105 105 109 Pepper 70 69 65 66 54 59 52 47 65 65 65 Palm oil 2,413 2,658 3,266 4,003 4,008 4,480 4,899 5,380 5,640 5,466 5,771 Forestry /b Log 25,312 23,892 28,267 26,848 24,027 24,850 26,069 29,520 19027 20,620 13,798 SawnTimber 3,117 3,006 3,534 2,244 1,730 2,014 3,565 2,613 2707 2,060 3,021 Plywood 9,415 9,124 9,874 9,924 8,066 9,122 10,270 6,710 7155 4,612 3,711 /a Dry husk paddy grain ready for milling. /b In thousand cubic meters, and in GOI FY -April to March until the year 1999, and April to December in FY 2000. Source: Central Bureau of Statistics, Ministry of Agriculture, and Ministry of Forestry. Table 30. Production of Maior Crops by Type of Estate. 1990-2000 (thousand tons) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Smallholders Rubber 913 919 1,030 1,102 1,139 1,191 1,193 1,174 1,243 1,295 1,240 Coconut/copra 2,313 2,317 2,426 2,558 2,601 2,662 2,687 2.620 2,690 2,700 2,689 Coffee 384 390 409 410 422 430 436 396 470 466 1,503 Tea 31 32 32 37 30 33 34 33 34 34 34 Sugar 1.609 1,610 1,653 1,685 1,673 1,368 1,512 1,196 759 760 908 Tobacco 152 157 110 119 128 137 148 206 102 102 102 Pepper 70 69 65 66 54 59 52 47 64 65 65 Cotton 33 13 13 14 14 8 8 7 5 7 5 Palm oil 0 0 0 582 839 1,001 1,134 1,293 1,348 1,441 1,503 Private estates Rubber 145 146 163 166 172 182 179 190 226 224 228 Coconut/copra 19 20 29 30 27 28 55 63 66 66 67 Coffee 13 13 11 12 11 11 10 11 19 19 19 Cloves 2 2 2 2 2 2 2 1 2 2 2 Tea 29 30 28 33 31 34 39 33 42 40 39 Sugar 204 257 178 251 272 287 265 630 424 512 612 Tobacco 0 0 0 0 0 0 0 0 0 0 0 Pepper 0 0 0 0 0 0 0 0 0 0 0 Cotton 0 0 0 0 0 0 0 0 0 0 0 Palm oil 789 884 1,077 1,370 1,597 1,864 2,058 2,287 2,435 2,553 2,658 Govemment estates Rubber 217 219 205 208 188 200 202 188 193 196 200 Coconut/copra 0 0 0 18 21 15 19 21 22 22 23 Coffee 16 16 17 17 18 17 13 21 26 26 26 Cloves 0 0 0 0 0 0 0 0 0 0 0 Tea 95 97 94 95 78 87 97 88 91 88 83 Sugar 306 386 476 394 509 422 317 365 305 217 321 Tobacco 4 4 2 2 2 3 3 3 2 2 2 Pepper 0 0 0 0 0 0 0 0 0 0 0 Cotton 0 0 0 0 0 0 0 0 0 0 0 Palm oil 1,624 1,774 2,189 2,051 1,572 1,614 1,707 1,800 1,857 1,995 2,097 Source: Central Bureau of Statistics and Ministry of Agriculture. Table 31. Rice-Area Harvested. Production and Yield. 1990-2001 Area Average Paddy Rice Year harvested yield output output /a Growth (thd. ha) (tons/ha) (thd. tons) (thd. tons) (%) 1990 10,502 4.3 45,179 29,366 1.0 1991 10,282 4.3 44,689 29,048 -1.1 1992 11,103 4.3 48,240 31,356 7.9 1993 11,013 4.4 48,181 31,318 -0.1 1994 10,734 4.3 46,641 30,317 -3.2 1995 11,439 4.3 49,744 32,334 6.7 1996 11,570 4.4 51,102 33,216 2.7 1997 11,141 4.4 49,377 32,095 -3.4 1998 11,716 4.2 49,200 31,980 -0.4 1999 11,963 4.3 50,855 33,056 3.4 2000 11,793 4.4 51,899 33,734 2.1 2001 /b 11,412 4.4 50,096 32,563 -3.5 a/ Estimated on the basis of a conversion factor of 0.68 from paddy into rice for the years prior to 1989, and 0.65 for the years 1989 and after. b/ Projections. Source: Central Bureau of Statistics. Table 32. Production of Minerals, 1990-2001 Crude oil Tin Copper ore Nickel Iron sand Natural Year and condensate concentrate concentrate ore Bauxite Coal concentrate Gold Silver gas (mlnbbls) < ------- ------------ Metrictons - --------------------------> (kg) (kg) (mrmscf) 1990 534 30 399 2,217 1,206 10,462 145 9,355 62,158 2,828 1991 581 30 657 2,300 1,406 14,143 173 13,889 77,897 2,462 1992 551 28 907 2,512 804 23,120 288 37,987 99,954 2,583 1993 547 30 928 1,976 1,320 27,605 341 42,097 90,301 2,662 1994 551 31 1,065 2.312 1,342 31,238 335 42,605 107,026 2,942 1995 547 38 1,517 2,513 899 41,517 348 62,818 265,222 2,999 1996 554 51 1,759 3,427 842 47,339 425 83,660 254,893 3,167 1997 549 55 1,841 2,830 809 52,074 487 89,979 270,392 3,189 1998 538 54 2,640 3,233 1,056 60,321 561 124,019 348,974 2,979 1999 495 48 2,645 3,235 1,143 70,703 562 129 292 3,064 2000 518 50 3,194 3,349 1,175 76,820 538 118 335 2,907 2001 /a 165 12 841 991 231 19,758 136 29 101 961 /a Data January-April2001 Source: Central Bureau of Statistics. Table 33. Fuel Production by Comnany. 1990-2001 (thousand bbls) Crude Oil Condensate Natural gas (000 MSCF) Pertanina Production sharing Contract Pertamina Production sharing Contract Pertamina Production sharing Contract of Work Contract of Work Contract 1990 24,137 427,447 12,726 187 65,807 157 260,878 1,868,647 1991 24,816 479,698 10,166 192 65,832 135 256,290 2,118,336 1992 24,613 451,912 9,405 109 64,677 132 270,882 2,308,299 1993 27,196 450,736 7,213 54 62,134 97 283,329 2,380,557 1994 23,761 462,694 0 67 64,624 0 300,233 2,644,745 1995 20,656 465,812 0 273 60,155 0 329,675 2,675,683 1996 27,251 463,570 0 60 63,042 0 345,193 2,821,427 1997 31,423 454,159 0 95 59,034 0 340,451 2,747,548 1998 43,090 438,565 0 518 55,327 0 338,012 2,641,448 1999 41,161 400,183 0 209 53,972 0 327,584 2,740,238 2000 45,683 419,700 0 720 51,401 0 347,662 2,559,665 2001 /a 15,137 132,909 0 165 16,856 0 116,799 843,887 /a Data January - April 2001 Source: Ministry of Mines and Energy. Table 34. Domestic Sales of Petroleum Products, 1990-2001 (thousand bbls.) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Aviation gas 59 58 54 51 50 51 51 46 35 35 34 Aviation turbo 4,607 4,889 5,315 6,039 10,188 10,969 7,206 7,325 4,980 4,107 4,680 Regular gasoline 39,005 43,023 45,308 46,733 52,463 57,798 63,747 67,700 68,576 71,978 78,125 Kerosene 49,472 50,573 53,850 54,242 56,110 58,188 61,656 62,302 63,407 72,424 78,322 Motor diesel 72,950 80,837 92,061 104,460 100,730 106,755 119,138 136,509 122,967 126,721 136,481 Industrial diesel 10,720 10,806 11,318 11,445 11,174 10,069 8,679 8,821 7,950 9,491 9,125 Fuel oil 24,847 28,899 29,313 30,154 25,456 25,543 24,524 31,607 32,681 33,935 37,471 Total 202,707 219.085 237,219 253,124 256.171 269,373 285,000 314,311 300,594 318,692 339.524 Source: Ministry of Mines and Energy. Table 35. Domestic Prices of Petroleum Products. 1985-2001 (Rp.Aliter) Apr-i, 1985- Jul-10, 1986- May-25, 1990- Jul-11, 1991- Jan-8, 1993- May-5, 1998- May-16, 1998- Oct-2000 - June 16, 2001 Jul-9, 1986 May-24, 1990 Jul-10, 1991 Jan-7, 1993 May-4, 1998 May-16, 1998 Sep-2000 June 15, 2001 - Present Subsidy price /c Aviation gas 330 300 330 400 420 600 /b /b /b Aviation turbo 330 300 330 400 250 600 /b /b /b Premium gasoline 440 440 /a /a /a /a /a /a /a Regular gasoline 385 385 450 550 700 1,200 1,000 1,150 1450 Kerosene 165 165 190 220 280 350 280 350 400 Motor diesel 242 200 245 300 380 600 550 600 900 Industrial diesel 220 200 235 285 360 350 350 400 600 Fuel oil 220 220 220 220 240 350 350 350 400 /a Discontinued since May 20, 1990 lb No longer regulated by the government since May 16, 2000 /c Since August 2001, there are four levels of prices; subsidy prices, 100%, 50% of world market prices and bunker international prices. Source: Ministry of Mines and Energy. Table 36. Indonesia Wholesale Price Index. 1990-2001 /a (1983 = 100) /b Sectors'/c 1990 1991 1992 1993 1994 1995 1996 1997 1998. 1998 1999 2000 2001/d Agriculture (40) 191 206 225 251 298 355 400 445 750 298 410 459 594 Mining&quanrying(8) 169 188 201 218 237 266 296 318 396 173 214 236 281 Manufacturing(1183) 176 194 206 218 231 256 265 275 455 217 268 278 315 Imports (50) 191 201 208 211 215 230 243 261 598 286 289 316 368 Exports (46) 159 153 159 157 157 178 203 238 592 417 366 461 540 Excluding petroleum & gas (43) 195 203 212 223 255 298 306 353 994 444 370 393 482 Petroleum (3) 148 139 143 137 128 142 173 204 474 348 355 634 686 General index (327) 178 187 197 204 215 240 259 282 568 288 320 363 430 General index excluding exports (281) 185 199 210 221 235 261 280 298 560 250 298 320 430 General index excluding exports of petroleum (324 182 198 211 227 250 285 303 326 588 284 311 333 397 /a Figures show the average for the year. /b Startingl998 onward - present based on 1993=100. /c Figures within brackets ( ) under sector column indicate number of items represented in that sectors /d Index of July 2001 Source: Central Bureau of Statistics. Table 37. Consumer Price Index, 1990-2001 /a /b End of Foodstuff Housing Clothing Education Prepared food Health Transport and Others Total Change period and beverages Communication (percent) /c 1990 109.3 107.8 111.2 - - - - 112.4 112.4 5.6 1991 118.3 128.2 117.1 - - - - 126.7 123.0 9.4 1992 127.4 136.8 124.1 - - - - 137.6 131.9 7.2 1993 136.3 154.9 135.7 - - - - 150.7 145.1 10.0 1994 151.1 170.1 144.5 - - - - 158.3 157.4 8.5 1995 171.2 185.1 153.8 - - - - 168.4 172.3 9.4 1996 187.4 194.8 164.2 - - - - 184.6 185.9 7.9 1997 108.7 105.2 105.5 104.2 108.5 109.1 103.7 - 106.1 6.1 1998 209.2 173.9 141.7 191.7 179.5 147.0 145.1 - 168.2 58.5 1999 261.5 164.8 230.7 165.3 215.9 218.1 169.4 - 202.8 20.5 2000 249.0 175.2 245.3 183.9 229.5 229.9 182.8 - 210.3 3.7 2001 /c 266.7 194.0 266.1 209.0 258.7 254.1 205.6 - 231.9 10.3 /a Consumer price index average of the year. /b Before 1997 using base period (April 1988-March 1989 = 100). Starting 1997 using new base period (1996=100), and classified into 7 components. /c Average index of the January - October 2001. Source: Central Bureau of Statistics. Table 38. Approved Foreizn Direct Investment by Sector. 1990-2001 /a (US$ million) Sector 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001/b Agriculture 117 14 66 138 690 1.153 1.306 437 965 413 390 280 Forestry 20 1 138 22 0 0 136 0 0 70 50 1 Fishery 20 11 28 0 40 231 80 27 33 9 5 81 Mining& quarrying 116 0 2.312 0 0 0 1.697 2 0 14 1 106 Manufacturing 5.822 3.970 5.669 3.423 18.739 30.441 19,884 23017 8.388 6.929 10,634 3,902 Food 99 382 213 141 1,235 1,332 691 573 342 681 701 122 Textiles & leather 1,094 532 591 419 396 471 515 373 217 240 401 301 Wood & wood products 218 62 34 50 68 263 101 70 71 113 157 9 Paper & paper products 730 822 686 202 5,120 2,540 2,907 5,353 41 1,412 88 728 Chenicals & Pharrnaceutical 1,991 923 2,342 1,171 7,743 19,368 7,362 12,376 6,179 3,268 7,407 1,715 Nomnetallic minerals 125 133 841 98 632 289 793 1,457 237 110 10 100 Basic metals 825 197 47 186 2,082 292 651 357 394 501 831 464 Metal products 460 856 863 1,114 1,423 2,258 2,939 2,332 891 593 1,005 0 Others 281 62 52 42 40 3,628 3,925 127 17 10 35 464 Construction 77 26 41 97 77 206 297 307 198 153 161 42 Hotels 874 4.019 919 394 344 999 1.717 463 451 229 257 263 Transport & cornunications 803 167 14 85 145 5,539 695 5.900 79 103 1.217 315 Real estate and business services 902 570 1.136 3,292 3,604 1.314 4,076 1.398 1,271 171 302 55 Toa 9.493 8.34 10.323 & 23.724 39.915 29.299 3383 1356 189 156284 575 /a Intended Capital Investment. Amount represents original approvals plus expansions minus cancellations. /b Preliminary data January to August 2001 Source: Investment Coordinating Board. Table 39. Approved Domestic Investment by Sector, 1990-2001 /a (Rp billion) Sector 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001/b Agriculture, fishery and livestock 6.442 3.468 1.952 2.835 7.140 8,621 16.026 14.642 4.772 1,586 1.543 1,239 Forestry 593 310 534 258 262 1,476 46 166 543 749 52 43 Mining 155 182 236 69 112 205 460 126 116 30 36 1.012 Manufacturing 39.850 27.624 19.079 24.037 31.933 43.962 62.703 79.334 44.908 94.335 81,994 36.024 Textiles 12,561 3,646 2,546 3,539 5,518 7,177 3,366 6,831 1,138 2,524 2,386 1,926 Chemicals 7,894 8,425 3,299 7,689 5,150 8,740 13,335 22,497 15,583 2,431 56,436 19,889 Electrical goods 0 0 0 5 12 620 3,486 11,639 3,469 51,917 274 234 Other manufacturing 19,395 15,553 13,235 12,804 21,253 27,425 42,517 38,367 24,718 37,463 22,898 13,975 Construction 87 275 215 187 731 848 1,550 877 1.992 395 843 1.973 Hotels 4,703 3,895 3,115 3.051 4342 3,792 5.019 2588 1.150 1.713 154 1,636 Real estate 1.783 2.633 536 3.049 3.336 4.659 8,688 4.301 1,548 996 293 438 Others 2,898 1785 3.675 5.965 5,434 6.290 6,224 17,839 5720 1356 3,227 1570 IQ2 56.511 41.078 2=2945 22 629.5 10 2.715 ,112873 ,60.749 88.143 2 /a Figures refer to intended capital investments, and represent original approvals plus approved expansion minus cancellations. /b Preliminary data January to August 2001 Source: Investment Coordinating Board.