Economy of Indonesia

Indonesia has a market-based economy in which the government plays a significant role. It owns more than 164 state-owned enterprises and administers prices on several basic goods, including fuel, rice, and electricity. In the aftermath of the financial and economic crisis that began in mid-1997, the government took custody of a significant portion of private sector assets through acquisition of nonperforming bank loans and corporate assets through the debt restructuring process.

During the 30 years of Soeharto's "New Order" government, Indonesia's economy grew from a per capita GDP of $70 to more than $1,000 by 1996. Through prudent monetary and fiscal policies, inflation was held in the 5%-10% range, the rupiah was stable and predictable, and the government avoided domestic financing of budget deficits. Much of the development budget was financed by concessional foreign aid.

In the mid-1980s, the government began eliminating regulatory obstacles to economic activity. The steps were aimed primarily at the external and financial sectors and were designed to stimulate employment and growth in the non-oil export sector. Annual real GDP growth averaged nearly 7% from 1987-97, and most analysts recognized Indonesia as a newly industrializing economy and emerging major market.

High levels of economic growth from 1987-97 masked a number of structural weaknesses in Indonesia's economy. The legal system was very weak, and there was and is no effective way to enforce contracts, collect debts, or sue for bankruptcy. Banking practices were very unsophisticated, with collateral-based lending the norm and widespread violation of prudential regulations, including limits on connected lending. Non-tariff barriers, rent-seeking by state-owned enterprises, domestic subsidies, barriers to domestic trade, and export restrictions all created economic distortions.

The regional financial problems that swept into Indonesia in late 1997 quickly became an economic and political crisis. Indonesia's initial response was to float the rupiah, raise key domestic interest rates, and tighten fiscal policy. In October 1997, Indonesia and the International Monetary fund (IMF) reached agreement on an economic reform program aimed at macroeconomic stabilization and elimination of some of the country's most damaging economic policies, such as the National Car Program and the clove monopoly, both involving family members of President Soeharto. The rupiah failed to stabilize for any significant period of time, however, and President Soeharto was forced to resign in May 1998. In August 1998, Indonesia and the IMF agreed on an Extended Fund Facility (EFF) under President Habibie that included significant structural reform targets. President Abdurrahman Wahid took office in October 1999, and Indonesia and the IMF signed another EFF in January 2000. The new program also has a range of economic, structural reform, and governance targets.

The effects of the financial and economic crisis were severe. In 1998, real GDP contracted by an estimated 13.7%. The economy bottomed out in mid-1999, and real GDP growth for the year was an anemic 0.3%. Inflation reached 77%in 1998 but slowed to 2%in 1999. The rupiah, which had been in the Rp 2,400/USD1 range in 1997 reached Rp 17,000/USD1 at the height of the 1998 violence, returned to the Rp 6,500-8,000/USD1 range in late 1998. It has traded in the Rp 6,500-9,000/USD1 range since, with significant volatility. Although a severe drought in 1997-98 forced Indonesia to import record amounts of rice, overall imports dropped precipitously in the early stage of the crisis in response to the unfavorable exchange rate, reduced domestic demand, and absence of new investment. Although reliable unemployment data are not available, formal sector employment contracted significantly.

As of September 2000, Indonesia's economic outlook is mixed. Recently released economic data provide evidence that the economic turnaround that began in the second quarter of 1999 has continued and accelerated. According to the Central Bureau of Statistics (BPS), year-on-year real GDP growth reached 4.13% in August 2000. Driving this higher than expected GDP growth are record exports, solid manufacturing growth, and continued strong levels of household consumption. At the same time, high petroleum prices are increasing the value of Indonesia's oil exports. As the economy has picked up, there has been a significant increase in corporate debt restructuring, although questions remain about the viability of some deals.

Less positively, foreign investment still lags far below its pre-crisis levels; the rupiah has lost more than 22% of its value since President Wahid was elected, and the stock market is in record low territory. Indonesia's banking and corporate sectors are still extremely weak. Asset sales by the Indonesian Bank Restructuring Agency have slowed amidst turmoil in the agency's senior leadership. Banking sector reform has stalled. Progress on corruption cases against is excruciatingly slow and capricious. These developments have shaken most analysts' faith in the reform credentials of the Wahid administration.

Indonesia's public sector external debt rose from $54.2 billion in March 1998 to about $80 billion by mid-2000. Private sector external debt stood at approximately $82 billion.

Oil and Minerals Sector
Indonesia, the only Asian member of the Organization of Petroleum Exporting Countries (OPEC), ranks 15th among world oil producers, with about 2.4% of world production. Crude and condensate output averaged 1.5 million barrels per day (b/d) in 1999. In the 1998 calendar year the oil and gas sector, including refining, contributed approximately 9% to GDP and, in FY 1999-00, provided 28% to domestic revenues. The sector's share of export earnings was 20% in 1999, a greater percentage than recent years due to high world oil prices. U.S. companies have invested heavily in the petroleum sector. With domestic demand for petroleum fuels expanding, Indonesia will become a net importer of oil by the next decade unless new reserves are found. In 1999, Indonesian imports of crude oil and petroleum products totaled $3.2 billion while Indonesian exports of crude oil and oil products totaled $10.7 billion.

The state owns all oil and mineral rights. Foreign firms participate through production-sharing and work contracts. Oil and gas contractors are required to finance all exploration, production, and development costs in their contract areas; they are entitled to recover operating, exploration, and development costs out of the oil and gas produced.

Although minerals production traditionally centered on bauxite, silver, and tin production, Indonesia is expanding its copper, nickel, gold, and coal output for export markets. In mid-1993, the Department of Mines and Energy reopened the coal sector to foreign investment, with the result that the leading Indonesian coal producer now is a joint venture between U.K. firms BP and Rio Tinto. Total coal production reached 74 million metric tons in 1999, including exports of 55 million tons. The Indonesian Government hopes to surpass 100 million metric tons of coal production in 2002. Two U.S. firms operate three copper/gold mines in Indonesia, with a Canadian and U.K. firm holding significant other investments in nickel and gold, respectively. In 1998, the value of Indonesian gold production was $1 billion and copper, $843 million. Receipts from gold, copper, and coal comprised 84% of the $3 billion earned in 1998 by the mineral mining sector.

Investment
Since the late 1980s, Indonesia has made significant changes to its regulatory framework to encourage economic growth. This growth was financed largely from private investment, both foreign and domestic. U.S. investors dominated the oil and gas sector and undertook some of Indonesia's largest mining projects. In addition, the presence of U.S. banks, manufacturers, and service providers expanded, especially after the industrial and financial sector reforms of the 1980s. Other major foreign investors included Japan, the United Kingdom, Singapore, the Netherlands, Hong Kong, Taiwan, and South Korea.

The economic crisis made continued private financing imperative but problematic. New foreign investment approvals fell by almost two-thirds between 1997 and 1999. The crisis further highlighted areas where additional reform was needed. Frequently cited areas for improving the investment climate were establishment of a well- functioning legal and judicial system, adherence to competitive processes, and adoption of internationally acceptable accounting and disclosure standards. Despite improvements in the laws in recent years, Indonesia's intellectual property rights regime remains weak; lack of effective enforcement is a major concern. Under Soeharto, Indonesia had moved toward private provision of public infrastructure, including electric power, tollroads, and telecommunications. The financial crisis brought to light serious weaknesses in the process of dispute resolution, however, particularly in the area of private infrastructure projects. Although Indonesia continued to have the advantages of a large labor force, abundant natural resources and modern infrastructure, private investment in new projects largely ceased during the crisis.

Economic Relations with the United States U.S. exports to Indonesia in 1999 totaled $2.0 billion, down significantly from $4.5 billion in 1997. The main exports were construction equipment, machinery, aviation parts, chemicals, and agricultural products. U.S. imports from Indonesia in 1999 totaled $9.5 billion and consisted primarily of clothing, machinery and transportation equipment, petroleum, natural rubber, and footwear. Economic assistance to Indonesia is coordinated through the Consultative Group on Indonesia[?] (CGI), formed in 1989. It includes 19 donor countries and 13 international organizations that meet annually to coordinate donor assistance. The 2000 CGI meeting is to be held October 17-18 in Tokyo.

The U.S. Agency for International Development (USAID) has provided development assistance to Indonesia since 1950. Initial assistance focused on the most urgent needs of the new republic, including food aid, infrastructure rehabilitation, health care, and training. Through the 1970s, a time of great economic growth in Indonesia, USAID played a major role in helping the country achieve self-sufficiency in rice production and in reducing the birth rate.

USAID's current program aims to support Indonesia as it recovers from the financial crisis by providing food aid, employment generating activities, and maintaining critical public health services. USAID is also providing technical advisers to help the Indonesian Government implement economic reforms and fiscal decentralization and is supporting democratization and civil society development activities through non-governmental organizations.

GDP: purchasing power parity - $610 billion (1999 est.)

GDP - real growth rate: 0% (1999 est.)

GDP - per capita: purchasing power parity - $2,800 (1999 est.)

GDP - composition by sector:
agriculture: 21%
industry: 35%
services: 44% (1999 est.)

Population below poverty line: NA%

Household income or consumption by percentage share:
lowest 10%: 3.6%
highest 10%: 30.3% (1996)

Inflation rate (consumer prices): 2% (1999 est.)

Labor force: 88 million (1998)

Labor force - by occupation: agriculture 45%, trade, restaurant, and hotel 19%, manufacturing 11%, transport and communications 5%, construction 4% (1998)

Unemployment rate: 15%-20% (1998 est.)

Budget:
revenues: $25.4 billion (of which $6 billion is from international financial institutions)
expenditures: $25.4 billion, including capital expenditures of $NA (FY99/00 est.)

Industries: petroleum and natural gas; textiles, apparel, and footwear; mining, cement, chemical fertilizers, plywood; rubber; food; tourism

Industrial production growth rate: 1.5% (1999 est.)

Electricity - production: 73.13 billion kWh (1998)

Electricity - production by source:
fossil fuel: 88.19%
hydro: 8.39%
nuclear: 0%
other: 3.42% (1998)

Electricity - consumption: 68.011 billion kWh (1998)

Electricity - exports: 0 kWh (1998)

Electricity - imports: 0 kWh (1998)

Agriculture - products: rice, cassava (tapioca), peanuts, rubber, cocoa, coffee, palm oil, copra; poultry, beef, pork, eggs

Exports: $48 billion (f.o.b., 1999 est.)

Exports - commodities: oil and gas, plywood, textiles, rubber

Exports - partners: Japan 18%, EU 15%, US 14%, Singapore 13%, South Korea 5%, Hong Kong 4%, China 4%, Taiwan 3% (1999 est.)

Imports: $24 billion (c.i.f., 1999 est.)

Imports - commodities: machinery and equipment; chemicals, fuels, foodstuffs

Imports - partners: Japan 17%, US 13%, Singapore 10%, Germany 9%, Australia 6%, South Korea 5%, Taiwan 3%, China 3% (1999 est.)

Debt - external: $140 billion (1998 est.)

Economic aid - recipient: $43 billion from IMF program and other official external financing (1997-2000)

Currency: Indonesian rupiah (Rp) = 100 sen

Exchange rates: Indonesian rupiahs[?] (Rp) per US$1 - 7,278.8 (January 2000), 7,855.2 (1999), 10,013.6 (1998), 2,909.4 (1997), 2,342.3 (1996), 2,248.6 (1995)

Fiscal year: 1 April - 31 March

See also : Indonesia