Regions and Countries

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p. 19 of 47 BACK | NEXT Developing Asia and the Pacific The global economy Newly industrialized economies Central Asian republics, Azerbaijan and Mongolia People’s Republic of China Southeast Asia Cambodia Indonesia Lao People’s Democratic Republic Malaysia Myanmar Philippines Thailand Viet Nam East Timor South Asia The Pacific

Indonesia

Economic performance

Economic growth: Indonesia achieved modest growth in 2000, with GDP rising by 4.8 percent, signaling the end of the sharp recession of 1998 in which GDP contracted by 13.1 percent and 0.8 percent growth occurred in 1999. This turnaround was mainly brought about by a rise in exports. Imports also recovered, but at a pace that was only about half of exports. In contrast to surging exports, domestic spending by businesses, households, and the public sector rose only moderately. Investment spending rose from a very low base, but has yet to demonstrate a broad-based recovery. Household income recovered from the recent recession, but weak demand for labor still restrained spending.

Employment: Indonesia has a relatively flexible labor market and even during the financial crisis, on an annual basis, the number of people reported working increased. Changes in aggregate economic activity, even severe changes, are reflected in real wage rates rather than in aggregate employment. Thus, preliminary estimates for 2000 suggest that modest GDP growth encouraged only a small increase in aggregate employment—up roughly 2 percent from 1999.

Inflation: During 2000, consumer price inflation registered 3.8 percent, considerably lower than the 20.7 percent rate in 1999. Price increases were larger than targeted, especially during the second half of 2000 when renewed weakness in the rupiah led to upward inflationary pressure. In addition, higher fuel costs, resulting from the Government’s program of reducing subsidies, also led to price increases in the second half of the year.

Fiscal balance: Budgeted spending (including transfers to local governments) in FY2000¹⁰ was projected to increase relative to the previous fiscal year by slightly more than one percentage point to 21.6 percent of GDP. Against this, revenues were budgeted to increase by only about one-half percentage point. The overall budget deficit was thus projected to reach 4.8 percent of GDP in FY2000, up from 4 percent during the preceding fiscal year.

The largest single element in the expenditure budget is domestic interest payments, at 4.2 percent of GDP. Interest payments on external debts are less than half the domestic debt burden.

External sector: Exports in 2000 were a significant factor in restoring economic growth. Most of the increase in exports occurred in non-oil and gas products, electrical equipment, textiles, and some natural resource products, particularly aluminum and nickel. Imports were led by raw material purchases. Capital goods imports have yet to recover, indicating lack of widespread investment spending. Overall, the current account showed a surplus of $7.8 billion or 5.1 percent of GDP in 2000. The inflow of funds from exports was partially offset by continued capital outflow—both net negative foreign direct investment and outflows of portfolio capital.

Domestic policies: In 2000, the Indonesian Parliament sponsored a national debate that led to the adoption of a medium-term development strategy. The strategy sets out five broad national objectives: (i) ensuring national cohesion and social stability; (ii) achieving good governance and rule of law; (iii) accelerating economic recovery and strengthening the foundations of sustained growth; (iv) developing the social sectors and human welfare; and (v) strengthening regional autonomy, rural and urban development, and structural poverty programs.

In 2000, published reports suggested that as many as one million people had been displaced because of violence or threats of violence. The peace and order situation has been a major factor in discouraging investment, both domestic and foreign.

The focus on improving good governance is a result of the crisis since in many respects the weakest link in Indonesia’s past development strategy was governance. The Government’s strategy includes an anticorruption program; administrative and fiscal decentralization; improved public financial management; civil service reforms; dismantling state monopolies; and further deregulating trade, finance, industry, and investment. The Government also attaches high priority to widening the scope for market-based economic decision making.

Although access to social services has generally improved, the quality of services has not matched needs, especially as Indonesians face an increasingly open international market.

Next to debt service, subsidies are the largest item in central government spending, accounting for 3–4 percent of GDP. The largest subsidy is for petroleum products and smaller subsidies exist for food and electricity. In an effort to reduce subsidies, fuel prices were raised in October 2000; however, this met considerable political opposition.

The economic crisis resulted in a transfer of financial assets to the public sector, reflecting recapitalization of the banking subsector. The next steps involve asset sales or privatization to provide revenues that will offset the large public debt and increase the scope for private sector development. Toward the end of 2000, the Government asset management agency, the Indonesian Bank Restructuring Agency, had successfully met its 2000 targets mainly through a series of large sales to foreign investors.

In 2000, the Government issued regulations for implementing decentralization laws passed in 1999. These programs will transfer major administrative and fiscal responsibilities to local governments, largely at the district level, to meet local needs.

ADB operations

Operational strategy: ADB’s operational strategy for Indonesia was completed in 2000. The strategy focuses principally on reducing poverty and regional inequities. The strategy recognizes the need for considerably improved governance and encourages sustainable recovery and pro-poor growth by enabling private sector development; improving regional equity through balanced regional development; promoting human and social development; and mainstreaming environmental management to ensure sustainable use of natural resources.

Policy dialogue: Policy dialogue with the Government occurred in forums such as the Consultative Group for Indonesia, the Governance Partnership meetings, and in discussions on program loan implementation.

ADB assisted the Government in drafting regulations on decentralization under the Community and Local Government Support Sector Development Program.

Dialogue on the financial sector focused on pending reforms in financial and corporate governance, including greater accountability of company directors and auditors and introduction of a law to prevent money laundering. Financial sector supervision and regulation were also discussed, including issues relating to the nonbank financial sector and an appropriate policy environment for small and medium enterprise (SME) development.

Reforms in the power subsector have been stalled pending the promulgation of the new Electricity Law. Restructuring Perusahaan Listrik Negara (the national electric board), which is essential for developing a more efficient and competitive market for electricity, has also been delayed.

Loans and technical assistance: In 2000, ADB approved seven loans totaling $800.0 million, including one program loan. The loans were for SME development, rural development, road rehabilitation, environmental protection, higher education, and decentralized health services. A project to assist girl street children in Yogyakarta received a grant from the Japan Fund for Poverty Reduction. ADB also approved 16 technical assistance grants totaling $13.4 million, 4 of which were for project preparation.

Project implementation: Since joining ADB in 1966, Indonesia has received 254 loans, of which 74 were active at the end of 2000. Contract awards totaled $707.3 million, bringing the cumulative total to $10.7 billion. The contract award ratio was 20.3 percent, lower than the ADB-wide average of 21 percent. Disbursements during the year totaled $748.4 million, bringing cumulative disbursements to $11.4 billion. The disbursement ratio was 18.5 percent, lower than the ADB-wide average of 20.5 percent.

The 2000 country portfolio review highlighted both project-specific and countrywide issues that inhibited implementation: insufficient government counterpart funds, delays in disbursements because of slow approval of withdrawal applications by the Government and ADB, slow approval of contract awards, and uncertainties surrounding the changes in Cabinet and the decentralization laws. Agreements have been reached on ways to handle these issues on a project-specific basis, and as a coordinated government response.

The ADB crisis-related program loan package provided considerable budgetary support to the Government, particularly in maintaining vital social sector expenditures. In 2000, program loan tranches totaling $270 million were released. An important achievement was facilitating critical implementing regulations under laws on decentralization.

The Indonesia Resident Mission (IRM) continued to play a significant role in project administration, with 20 ongoing loans assigned to it for administration. Following delegation of more responsibilities under the Resident Mission Policy, IRM is expected to focus more prominently on improving portfolio performance, and is expected to have a more effective role in policy dialogue. To address a critical issue, such as the lack of counterpart funds, ADB agreed to increase its share in financing project cost to 80 percent during the first three years of implementation for projects approved in 2000.

   

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