Indonesia's Economy

GOVERNMENT BUDGET

REVENUES

Revenues from the non-oil and gas sector is envisaged at Rp 99.6 trillion, primarily on the back of larger tax revenues from the export of crude palm oil (CPO).

Revenue from oil and gas is expected at Rp 49.71 trillion. It is worth noting that Indonesia is a major oil exporter.

Meanwhile foreign aid revenue is envisaged at Rp 127.8 billion.

EXPENDITURES

Government spending is divided into two broad categories in the budget; routine expenditures and development expenditures.

Routine expenditure is envisaged at Rp 61.6 trillion, up from the previous Rp 12.3 trillion due to a rise in the fuel subsidy and to anticipate increasing subsidies for basic food items. In fiscal year 1997/98 routine expenditure was earmarked for Rp 84,606.2 billion.

Development expenditure, meanwhile, is allocated Rp 92.68 trillion, up from the earlier amount of Rp 71.6 trillion.

DEBT

Indonesia's total external debt outstanding at the end of March 1998 was US$138.018 billion up from US$108.7 billion at the end of March 1997.

The total amount of government external debt outstanding, at the same time, amounted to US$54.159 billion and private debt outstanding US$83.859 billion.

The decline in the rupiah's value by almost 80% since July 1997 had caused the value of the country's overseas private-sector debt, in particular, to sky-rocket. To deal with the debt problems the Government established the Indonesia Debt Restructuring Agency (INDRA).

In the 1998/99 budget, the Government allocated Rp 94.5 trillion for government debt repayment and Rp 77.55 trillion for foreign debt servicing, including about Rp 46.51 trillion for principal repayment and more than Rp 31 trillion for interest payment.

Revised Balanceof Payments Projections 1998/1999
(in billion US Dollars)

Note: Some figures don't add up due to rounding up.
Source: From Minister of Finance's Statement at the House of Representatives, July 16, 1998

CURRENCY AND FOREIGN EXCHANGE

Indonesia's currency is the rupiah. Notes come in denominations of 50,000, 20,000, 5,000 1,000, 500, and 100 while coins come in denominations of 1,000, 500, 100, 50, 25, 10 and 5.

The system of liberal foreign exchange based on the price flow of foreign exchange controls is continuously maintained. However, regulations have an impact on the exchange system, say, for example, only foreign exchange banks are authorized to execute foreign exchange transaction related to the import and export goods.

Money in supply or narrow money (MI) grew at an annual average of 26.9%, from Rp 37.9 trillion in March 1994 to Rp 98.3 trillion in March 1998. During fiscal year 1997/98 alone it increased sharply by 54.6%. Meanwhile, liquidity or broad money (M2) swelled by 31.9% on average per year. In fiscal year 1997/98 broad money grew by 52.7% due largely to the decrease of rupiah exchange rate.

BANKING AND OTHER FINANCIAL INSTITUTIONS

The Indonesian banking sector has been badly hit by the rupiah's sharp plunge against the US dollar. The rupiah's fall has multiplied the value of the banks' foreign debts as well as the value of their dollar loans, which mostly fall under the non-performing category due to the real sector's bleak performance and their failure to make the necessary credit risk assessments.

The banking crisis has seen a drying out in overseas credit for local exporters to import their raw materials, while domestic financing is virtually nonexistent since local banks are now unable to risk more non-performing debts. The national banking industry has also worsened because of massive outflows and worsening corporate woes.

In a bid to revive the lackluster banking industry the Government has subsequently taken the necessary steps, including the liquidation of 16 ailing banks out of 237 banks (in fiscal year 1996/97).

Such a bold step was followed by a move to restructure the ailing banking sector, and for that purpose the government established the Indonesian Bank Restructuring Agency (IBRA).

Charged with restructuring and speeding up the recovery of Bank Indonesia's liquidity credits already injected into problem banks, IBRA has intervened in the 54 banks whose emergency borrowings from Bank Indonesia surpassed 200% of their capital. Another important move taken by IBRA was to suspend the rights of owners and management of seven banks having borrowed more than Rp 2 trillion from Bank Indonesia (BI), comprising 75% of the total of BI lending. IBRA also took control of seven banks that have borrowed more than 500% of their total assets from BI with a right to immediately transfer their assets and abilities to other banks, while intensifying its control over the remaining IBRA banks by issuing government contracts through these banks and preparing to remove their foreign exchange licenses.

In another concerted effort to speed up the restructuring process of the country's ailing banking industry, the government set a minimum paid-up capital of Rp 250 billion (US$16.2 million) by the end of 1998 for newly established banks, lower than the previous tough minimum paid-up capital adequacy ratio (CAR) for banks respectively to 4% by the end of 1998, 8% by the end of 1999 and 10% by the end of 2000. The previous CAR requirements were 8% by the end of 1998, 10% by the end of 1999 and 12% by the end of 2000.

More sweeping taken by the Government was to suspend the operation of seven ailing banks, take over the management of seven additional banks deemed to be unsound under the IBRA, and placing 40 banks (including three state-owned banks and 11 provincial development banks) under its supervision.

It is expected that by consolidating more banks under IBRA, the government could merge their operations under its control and reduce them to a manageable number.

The last positive move taken by the government to freeze, merge and nationalize 11 of the country's weakest banks was lauded by the IMF. The move, which included nationalizing the country's highest private bank, Bank Central Asia (BCA)- has been the clearest sign so far that the government through IBRA is ready to take tough measures. Meanwhile, four state banks merged into Bank Mandiri, were Bank Exim, Bank Bumi Daya, Bank Dagang Negara and Bapindo.

The government would also submit to parliament a law eliminating existing restrictions on foreign ownership of banks.

BANK INDONESIA

Bank Indonesia is the country's central bank. Pursuant to the Central Bank Act of 1968, its major functions are to issue currency, devise and implement the monetary policy, act as the government's banker, and supervise and regulate financial institutions. Thus, it is the sole issuer of the country's currency, i.e. the rupiah. It holds the official international reserves of the economy.

It regulates the liquidity position of banks by adjusting the minimum liquidity ratio and the minimum reserve requirements that all deposit-money banks are required to maintain. It is the banker of last resort in the domestic banking system.

Bank Indonesia is also in charge of preparing and implementing the monetary policy under the direction of the Economic Stabilization Council, a government advisory body presided over by the President.

Directly responsible to the Government, BI is supervised by a commissioner appointed by the president, and is required to submit annual and supplemental budgets to the government for approval. The governor of the banks and his seven managing directors are appointed by the President for a five year tenure.

STATE OWNED BANKS

The number of state-owned banks shrank from the previous five (5) banks authorized to handle foreign exchange to only two (2) BNI (Bank Negara Indonesia), the largest of the banks in terms of assistance, and BRI (Bank Rakyat Indonesia), since BDN (Bank Dagang Negara), BBD (Bank Bumi Daya) and Bank Exim (Bank Eskpor and Import) have been merged into Bank Mandiri. In addition the country has also a savings bank, Bank Tabungan Negara (BTN) and Bapindo (also merged into Bank Mandiri) and 27 Regional Development Banks, with thousands of bank offices.

NATIONAL AND FOREIGN PRIVATE BANKS

THE INVESTMENT COORDINATING BOARD

FOREIGN AND DOMESTIC INVESTMENT

Foreign investment is known in Indonesia as Penanaman Modal Asing (PMA), and domestic investment is known as Penanaman Modal Dalam Negeri (PMDN).

The modern era of investment in the country was introduced with the enactment of the Foreign Investment Act of 1967 amended by Act No. 11 of 1970), and the passage of Domestic Investment Act of 1968 (amended by Act No. 12 of 1970).

In accordance with the economic reform and restructure the Government issued Regulation No. 16, 1998 (amended Regulation No. 2, 1996) concerning Foreign Investment Companies in Export and Import activities. This act gives more opportunities to foreign investment companies to take part as distributor or retailer in national import-export.

Higher production, improved industrial structure, new employment opportunities, equitable distribution of income, utilization of human and natural resources, promotion of exports, and environmental conservation are set to be the country's basic investment goals. Parallel with these, policies on investments put more emphasis on industries that produce capital goods, intermediate products and raw materials needed to establish a strong foundation for accelerating the industrial growth.

Special priority has been given to investments outside Java, particularly the country's eastern part which includes Kalimantan, Sulawesi, Nusatenggara, East Timor, Maluku and Irian Jaya in efforts to promote a more even distribution of investments and simultaneously to boost economic activities in those less-developed regions.

Keen interest on investment in Indonesia can be seen from the high growth of investment realization. In 1995, for instance, the formation of gross domestic product permanent capital was 13.8 percent, while it was 14.5 percent in 1996. Nevertheless, due to the economic crisis, investment value in 1998 is estimated to decrease sharply.

The approved projects of foreign and domestic investment in fiscal year 1997/98 were expected to create jobs for 682,000 people.

FOREIGN INVESTMENT

DOMESTIC INVESTMENT

By sector, the processing industry was still dominant by accounting for some 59.0 percent of the total approved domestic investment in fiscal year 1997/98. Meanwhile by location, West and East Java accounted for some 31.9 percent and 11.0 percent respectively of the total domestic investment value during fiscal year 1997/1998.

COOPERATIVES

Cooperatives which developed in almost all regions of Indonesia have become business institutions which strengthen the people's economy and increased the welfare of the members and the surrounding area. About 4,700 cooperatives have developed middle and big-scale businesses with a value of over Rp1 billion per year.

Development policies of cooperatives are realized through the following programs:

EDUCATION TRAINING AND INFORMATION OF COOPERATIVES

The main program is aimed at increasing the quality of entrepreneurship, professionalism, creativity and the capability of the members, organizers, employees and consultants of cooperatives. The capability of managers in applying, utilizing and developing science and technology is also enhanced.

To support the development of professional cooperatives, in 1997/98 (the fourth year of Repelita VI), 7,169 organizers, managers, employees and cadres, and field consultants (PKL) of cooperatives were trained. The program also trained 10,900 KUDs (Village Unit Cooperatives) managers and paid for comparative studies of 9,400 KUD organizers. The GNMMK (National Movement to Socialize and Culturize Entrepreneurs) program trained 707,000 people including cooperatives members and the public.

Until 1997/98, increasing business productivity had involved 266,200 groups of cooperatives.

IMPROVING FINANCIAL FUNDING INSTITUTIONS

This program is to increase the capability of cooperatives in utilizing the funds to develop a healthy capital structure; therefore, self funding especially from the members' mortgage and other sources, including banking credit should be sought.

In 1997, the mortgages of cooperative members amounted to Rp4.1 trillion or 27.6% higher compared to that in the previous year. The amount of the mortgages was 72.9% of the cooperatives working capital or an increase of 70.7% compared to that of the previous year. Meanwhile, in 1997 the cooperatives working capital increased 23.7% compared to that of the previous year.

In 1997, the distribution of credit for members of premier cooperatives (KKPA) amounted to Rp1,488.1 billion or an increase of 41.4% compared to that in 1996. To support business activities of cooperatives which are unable to provide collateral or credit guaranty, the cooperatives finance development institution (PKK) grants aid.

In an effort to support small business especially in villages, cooperatives channel credit as working capital under the simple condition of small vendor credits (KCK) amounting to Rp296,999.4 million. Until 1997, 6,478 cooperatives channeled KCK credits worth Rp297.0 billion, while 17,906,800 clients received KCK credits.

The Cooperatives Unit Savings/Cooperative Savings (USP/KSP) as finance institutions have grown and in 1997 the 39,700 units were worth Rp5.4 trillion.

EXPANSION OF COOPERATIVES

This program promotes services to members, such as business promotion, information on business opportunities and marketing, develop a marketing network, trade missions, provide marketing facilities and infrastructure, give guidance and market consultation, as well as intensification of the distribution system.

Until 1997/98, marketing facilities and infrastructure, especially in the least developed areas, in the form of small shop selling complete daily necessities (waserba) grew to 21,000 units. In 1997/98, the number of cooperatives which manage waserba and cooperative savings was 20,952 units.

In cooperation with PLN (the State-owned Electricity Company), in 1997/98, 4,001 cooperatives were active in marketing electricity services in the villages or an increase of 9.4% compared to that in the previous year to 15,534,000 houses in 36,006 villages or an increase of 17.2% and 25.8% compared to that in 1996/97.

COOPERATION AND EXPANSION OF COOPERATIVE UNDERTAKINGS

This program is aimed at enhancing the activities of cooperatives effectively and efficiently, both in the institution and business aspects. The program covers the cooperative undertaking network (JUK) which is developed through distribution and marketing, partnership between cooperatives with the private sector and with state-owned companies (BUMN), as well as through the sale of shares in private companies to cooperatives.

In the framework of enhancing participation of big regional entrepreneurs, the national partnership program began to extend their scope into some districts. Until 1997, the number of cooperatives and small entrepreneurs which participated in this program was 15,900 units, and 27,900 people respectively with a value of Rp1.6 trillion. In 1997/98, some 221 private companies had sold 168.1 million of their shares with a value of Rp135.5 billion to 3,506 cooperatives.

INTENSIFICATION OF COOPERATIVE INSTITUTION

The program aims to organize and strengthen cooperatives institutions in order to make the movement comply with the dynamic environment. In 1997/98, there were 52,100 cooperatives consisting of 8,500 KUDs and 43,600 non-KUDs. In 1997/98, the number of cooperatives increased by 3,000 units or about 6.1% followed by an increase of 1,760 members or 6.4% compared to that in the previous year.

COOPERATIVES DEVELOPMENT IN LEAST DEVELOPED AREAS

This program is meant to increase the quality of services to cooperative members and the community in the least developed areas.

Until 1997/98, 1,636 TPK-KUDs (Place of Cooperatives Services-Village Unit Cooperatives) have been built, 2,353 shops selling complete daily necessities (waserba) managed by KUDs and supported by professional self-supporting workers (TKMP).

INFORMATION AND RESEARCH

In 1997/98, improvement of the cooperatives information system on cooperative institution and undertakings covered the basic data system of cooperatives and small entrepreneurs.

In 1997/98 various researches were done on the policy and strategy to develop cooperative and small and medium-scale entrepreneurs and to strengthen the people's economy. Research also covered cooperation with other cooperatives and small-scale business at home and abroad, the role of cooperatives in developing an integrated economic growing area (KAPET), development of the rural industry pattern through cooperatives and small-scale business in facing GATT and APEC.

YOUTH AND WOMEN IN COOPERATIVES

In 1997/98, youths were trained and imbued with the pioneering spirit and business skill as managers and members of youth cooperatives, including cooperatives of Islamic Boarding Schools and encouraged to become businessmen at youth and college cooperates.

Improving of knowledge and skill, as well as the broadest possible opportunities are provided for women to participate actively in cooperatives. During four years of Repelita VI, 11,200 managers and members of women cooperatives in 27 provinces received training.