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SURVEY OF RECENT DEVELOPMENTS
Reza Y. Siregar
To cite this article: Reza Y. Siregar (2001) SURVEY OF RECENT DEVELOPMENTS, Bulletin of Indonesian Economic Studies, 37:3, 277-303, DOI: 10.1080/00074910152669127
To link to this article: http://dx.doi.org/10.1080/00074910152669127
Published online: 17 Jun 2010.
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ISSN00074918print/ISSN14727234online/01/03027727 ©2001IndonesiaProjectANU
S URVEY
OF
RECENT
DEVELOPMENTS
RezaY.Siregar*
NationalUniversityofSingapore
SUMM ARY
An unexpectedly quick and peaceful presidential transition fromAbdurrah -manWahid toMegawatiSukarnoputri inJulybroughtarenewedsenseofcon -fidencetobothdomesticpoliticsandthe economy.InmidAugustthenewpresi -dentexceededtheexpectations ofmany inherselectionofcabinetmembers,par -ticularly her choice of well respected technocratsandprofessionals tohandle theeconomic portfolios. Within about twoweeksofthecabinet’sinauguration, theeconomicteamsignedanewLetter ofIntent(LOI)totheInternationalMon -etaryFund(IMF),whichpavedtheway forthedisbursementinSeptemberofthe longdelayed$400millionloantranche toIndonesia.
Despitetheseencouraging signs,the economy remains fragile. Misuse of fundsandvarious formsofcorruption continuetohampereconomicrecovery. ThemurderofaSupreme Courtjudge shortlyafterMegawatitook officeand anotherbomb explosion inSeptember ata largeshoppingcentre inthe heart ofJakartaareremindersofthecurrent seriouslackofsecurity.
Achievingtargetssetinthe2001and 2002budgetsandmeetingtheLOIcom -mitmentsarethegovernment’scurrent major economic concerns. Indonesia’s recovery depends heavily onthe per -formance of the bank restructuring agency,IBRA,inrelationtoassetrecov -eries, and on privatisation of state -ownedenterprises. Thegovernmentis alsorelyingonobtainingfreshloansand securingapprovalfrommultilateraland bilateraldonorsfortherescheduling of existing foreign debt. Realistically speaking,noneofthesebudgetfinanc -ingsourcescanbetakenforgranted.
ANOTHERCHANGE
OFG OVERNMENT
On 23 July 2001, after the dismissal of Abdurrahman Wahid, Megawati Sukarnoputri wassworninasthecoun
-try’sfifth president—the fourth in the pastthreeyears.Thenewpresidenten -joys wide popular support and her party,theIndonesianDemocraticParty of Struggle (PDI-P), won more votes
BOX1 THEMEGAWATIPRESIDENCY
TheVicePresident
Mr HamzahHaz from the Muslim UnitedDevelopment Party (PPP) was electedvicepresidentbytheMPR.Hamzah’spartyhadwononly11%ofthe votesinthe1999generalelection, butherepresented theloosealliance of Muslimpartiesknownas theCentralAxis.Hispresenceinthetopleader -shipisexpectedtotieMuslimsupportersoftheCentralAxistothegovern -ment. Furthermore, as a representative from Kalimantan, he provides geographical balance in a government headed by Megawati, who is of Javanese–Sumatrandescent.
TheCabinet
ThecabinetisheadedbythreeCoordinating Ministersresponsible forPoliti -calandSecurityAffairs,theEconomy,andthePeople’sWelfarerespectively. Seventeenministersheaddepartments andtenwereappointedasMinisters ofStatewithresponsibilities inspecificfields.Finally,threenon-ministerial appointees—theStateSecretary, theAttorneyGeneraland theheadofthe National Intelligence Agency—weregiven cabinet status,and thecabinet statusof theplanningagency,Bappenas, wasreinstated, having beenlost underformerPresidentWahid.
Despiteearlierfears,thekeyeconomicpolicymakingpositionsinthecabi -netwereawardedtohighlyrespectedprofessionals withacknowledged cre -dentials.HeadingtheeconomicsteamisProfessorDorodjatunKuntjoro-Jakti, former DeanoftheEconomics Facultyat theUniversityofIndonesiaand formerAmbassadortotheUS.Anotherkeyfigureintheeconomicsteamis theMinisterof Finance, Boediono,who had servedon theboard ofBank IndonesiaunderPresidentSoeharto,andasheadofBappenasunderPresi -dentHabibie.TwoleadersofMegawati’sparty,PDI-P,bothofwhomserved briefly asministersunderWahid, werealso appointedtoeconomicposts. LaksamanaSukardiisMinisterofStateEnterprises, andKwikKianGie is nowheadofBappenas.Oneofthefirstactsofthegovernmentwastotrans -ferresponsibility forIBRAtoLaksamana.Afifthkeyeconomicminister is theMinisterofTradeandIndustry,RiniSoewandi,aleadingbusinesswoman andformer headofthe giantAstra group,who isalso linkedtoPAN(the NationalMandateParty)throughitschairman,thespeakeroftheMPR,Amien Rais.
thananyotherinthe1999generalelec -tion,securing153ofthe500seatsinthe People’sRepresentative Council(DPR) and185ofthe695placesinthePeople’s Consultative Assembly(MPR).On the
daysheappointedhercabinet(box1), she announcedher government’s six -point working program: to maintain nationalunity;tocontinue reformand democratisation; tonormaliseeconomic
BOX1(continued) THEMEG AWAT IPRES IDENCY
ofreform-mindedofficerswhoformulatedthemilitary’s‘NewParadigm’in 1998andsupportedtheconceptofciviliansupremacyoverthemilitary.A secondimportantmilitaryappointeeisLtGen.HariSabarno,whotakesover theDepartmentofInternalAffairs,aministrythathasbeeninmilitaryhands sincethepresidencyofMegawati’sfather.Sabarnoisoneofthedeputychair -menoftheMPR.
TheothertwomilitaryofficersarebothformerSpecialForcesintelligence officers whoarelinkedtoMegawati.LtGen.HendropriyonoandGeneral Agum Gumelarwonhergratitude whenPresidentSoehartoattemptedto preventherfromtakingovertheleadershipofthePDI—thepredecessor of thePDI-P—in1993.Hendropriyono atthetimewastheJakartaregionalcom -manderandAgumwasthecommandantofthe SpecialForces.Agumhas returnedtohisearlierpositionunderWahidasMinisterofTransport,while Hendropriyono,whorecentlyjoinedthePDI-Pandreportedlyplayedama -jorroleinadvisingMegawationthemake-upofthecabinet,hasbeenap -pointedheadoftheNationalIntelligence Agency.
Severalotherimportantappointmentsshouldbenoted.Megawatihasfol -lowedherpredecessor inappointingaciviliantotheDepartmentofDefence. IncontrasttoAbdurrahmanWahid’sfirst DefenceMinisterbutnotunlike hissecond,thenewminister,MatoriAbdulDjalil,isnotknownforanyex -pertiseondefenceissues.ThenewForeignMinisterisHassanWirayuda,a careerdiplomatwhoduringthelastyearhasoverseennegotiations withthe FreeAcehMovement.TheMinisterofJusticeandHumanRightsisProfessor Yusril Ihza Mahendra, chairman of the Muslim party PBB (Partai Bulan Bintang).TheStateSecretaryisBambangKesowo,acareerbureaucratwho duringtheSoehartoyearssteadilyworkedhiswayupthroughtheStateSec -retariat,whichhejoinedasayoungrecruitin1968.DuringtheWahidpresi -dencyheservedasSecretarytothenVicePresidentMegawati.
Selection of the new Attorney General wasdelayed by a week after the appointment of the rest of the cabinet—presumably because of a struggleamongvariousinterests,includingGolkar(thepartyofformer PresidentSoeharto,andthesecondlargestpartyintheDPR).Megawati resolved the battle by appointing a relatively little known prosecutor, M .A. R ahm an, from w ithin the Atto rney G eneral’s o ffice, wh ere corruption is widely regarded as entrenched. Rahman had headedthe AttorneyGeneral’sinvestigationofhumanrightsviolationsinEastTimor; notrialshavetakenplaceyetasafollow-uptothisinvestigation.
life;toupholdlaw,restoresecurityand peace,anderadicate corruption, collu -sionandnepotism;torestoreIndonesia’s international credibility; andtoprepare forthe2004generalelection.
The composition ofthenewcabinet hasforthe most partbeenpraised. Its membershipprovidesrepresentation to themainpoliticalforcesintheDPR,but qualified and professional ministers havebeen appointed tokey economic positions regardless ofpolitical affilia -tion,suggestingthatcoordinationofeco -nomicpolicy,whichwaslackingduring Wahid’s presidency, is likely be im -proved.1 Thedelayedchoiceofthenew AttorneyGeneralinjectedanoteofreal concern,however.Andtheappointment of M.A. Rahman to the post—a little knowncareerprosecutorwhohasspent 35yearsinthenotoriously corruptAt -torney General’s office—has created doubtsaboutthegovernment’sserious -nessinseekingtoeradicatecorruption, despite the president’searly warning that her own family should avoidin -volvementinit.Rahmanwasearlierre -sponsiblefora limp investigation into humanrightsabusesinEastTimor,and is seen as unlikely to act vigorously againstcorruption,whichinrecentyears hasspreadfromthecentreofpowerto becomemorepervasiveandlesspredict -able in character than before (Tempo, 21/8/01).
Otherpressingproblemsincludethe secessionistmovementsintheprovinces ofAcehandIrianJaya.Toemphasiseher commitmentto national unity, Mega -watimadeashortvisittoAcehinSep -temberand,inoneofherfirstspeeches aspresident,apologisedtoitspeoplefor mistakesandshortcomings inprevious governments’handlingoftheprovince (DowJonesNewswires,8/9/01).Butim -plementationofmoreconcretemeasures capable of dealingwith the separatist movements in these natural resource
abundantprovincesisstillawaited.The newpresidentalsoactedquicklytodis -pelfearsthatsheisaneconomicultra -nationalist, among other things by extendingthecontractofCaltextoman -age oil concessions in Riau, despite localopposition.
The US government sent its Trade Representative, Robert Zoellick, to Ja -kartainAugusttodeliveraletterofsup -portfromPresidentBush,andtoinvite Megawati to visit Washingtonin Sep -tember.Despitethe11Septemberterror -ist attacks on the US, this visit went ahead as scheduled. For her commit -menttojointheglobalwaragainstter -rorism, Megawati reaped instant and muchneededfinancialsupportfromthe US,includingtherestoration ofmilitary tiesandatotalof$657millioninfinan -cialassistance(box2).
S ecurityand
InstitutionalWeaknesses
inArun,Aceh, were closed down for aboutfourmonthsbecauseofdisruption byarmedciviliangroups.BymidOcto -ber all four clusters were operating again, but gas production had yet to resumefrom two onshore fields, and totaldaily production was only about 75% of last year’s average (Dow Jones Newswires, 16/10/01). During their meeting with President Megawati in Texas in September, both James R. MoffetofFreeportMcMoranandHarry J.LongwellofExxonMobilhadargued thatguaranteesofsecurityhadbecome indispensable for their companies to continueto operate inAceh and Irian Jaya(JP,24/9/01).
Already dampened by Megawati’s choiceofAttorneyGeneral,confidence intheabilityandresolveofgovernment officials to uphold the rule of law is likelytodeclinefurther.Otherimportant institutions that should play a central roleincleaningupthelegalsystemand helpingtostabilisethecountry,suchas thepoliceandthemilitary,haveinstead only created further embarrassment. Thenumberofreportedclashesbetween policeandsoldiersduring1997–99was 28;butin2000alone,90suchincidents
were reported(StraitsTimes,21/9/01). Anotheroccurred on15 September in Madiun,EastJava.Argumentsbetween three police officers and twomilitary policemen escalated intofierceattacks bymembersofaninfantrybattalionon Madiun police station and three sub -stations.Scoresofcivilianswereinjured andatleasttwowerekilled.
Some 81 bomb explosions were re -portedfromJanuarytoJuly2001,com -paredwitharoundsixin1998andseven in 1999. Another took place at the AtriumPlazashoppingmallincentral JakartaonSeptember23—thesecondat thislocationwithintwomonths.Inlate July, alarge numberofcasualtieswere reported when explosions rocked two churchesinJakarta.
M arketConfidence
Thesepoliticaldevelopmentshavehad a clear impacton private sector confi -dence—althoughthemostrecentevents donotyetshow upinpublished data. TheConsumerConfidenceIndexofthe DanareksaResearchInstitute(DRI)ex -tendeditsdescenttoalowof92inJune as the MPR’s dismissal of President Wahidloomedandthespectreofstreet
BOX2 SUMMARYO FUS PLEDGESTOIND ONESIAINSEPTEMBER2001
$400mtopromotetradeandinvestmentintheoilandgassector
$130mtofinancelegalandjudicialreforms
$100mofGSP(Generalised SystemofPreferences) facilitiesto expandbilateraltrade
$10mtoassistrefugeesinMaluku
$10mtotrainpolice
$5mtorebuilddestroyedschoolsandinfrastructure inAceh
$2mtoassistEastTimoresewhohavechosentostayinIndonesia
$400,000toeducateciviliansondefencemattersviolence battered consumersentiment (figure1).Followingtheinstallation of thenewMegawati governmentinlate July,therewasasignificant reboundto 112inAugust—thefirsttime‘optimists’ hadoutnumbered‘pessimists’sinceFeb -ruary2001.Similarly,theDRI’sBusiness SentimentIndexdeclinedsteadilydur -ingthefirstseven monthsof2001toa lowof109,butsawasignificantrebound to116 inAugustfollowingthe change inthepresidency.
Inflationandincreasinginterestrates, exchangeratevolatilityandheightened politicalriskhavebeenamongthekey contributors tobusinesspessimism.In July2001,theStandardandPoor ’srat -ingsagencylowered Indonesia’slong -term foreign currency rating to CCC+ from B–.Meanwhile, corporate profits weresqueezedfrom both therevenue andcostsides.Wagedisputes,newar -bitrary levies and illegal imposts, and theresurgenceofcoerced‘donations’are
afewofthefactorsthatraisethecostof production, but in current conditions producershavelimitedabilitytopasson highercoststoconsumers.
M ACROECONOMIC PERFORM ANCE G rowth
Withfurtherworseningoftheexternal environmentand increasing domestic politicaluncertainty,realGDPgrewby only0.2%inthesecondquarterof2001 (table1a).Onayear-on-yearbasisGDP grewby3.5%.Reflectingtheusualsea -sonal pattern, agricultural output de -clined in the June quarter after expanding strongly in the previous quarter.Inyear-on-yearterms,agricul -turaloutputgrewbyonly1.3%,consid -erably more slowly than theeconomy as a whole.Twoother sectors, mining andtransport andcommunication, ex -periencedslightcontractions intheJune quarter, while still recording positive
FIGURE1 ConsumerandBusinessConfidencea
aTheindicesareratiosofoptimiststopessimistsamongthosesurveyed.
Source:DanareksaResearchInstitute.
0 30 60 90 120 150
Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01
outcomes year-on-year.The declinein theminingsectorpartlyreflectedsecu -rityproblemsatkeyproductionsitesin various locations.All other sectors re -cordedpositivegrowthintheJunequar -ter.Theconstruction sector hasbeen a dragon theeconomyintermsofyear -on-yearfigures,althoughitgrew more rapidlyintheJune2001quarterthanin thepreviousfourquarters.Manufactur -ingalsoperformedrelativelywell.The large rise inthe output of theutilities sector(electricity,gasandwatersupply) ishardtoexplain.
Allcategoriesofexpenditure except importsandgovernmentconsumption
slowedintheJunequarter(table1b).The declineinthegrowthrateofprivatecon -sumption is consistent with the rela -tively sharp worsening of consumer confidence in June.Government con -sumption has exhibited considerable volatility fromonequartertothenext, growingby3.8%inthesecondquarter. Investment spending increased by more than 6% in thefirst quarter, but thenattheslowerrateof4.4%inthesec -ond, reflecting lower business confi -dence. M o re recent data from the InvestmentCoordinating Boardsuggest anevengloomierpicture, withrealisa -tion of investment projectspreviously
TABLE1a GDPGrowthbySector (%)
Jun-00 Sep-00 Dec-00 Mar-01 Jun-01
Year-on-year
GDP 5.2 4.4 5.2 3.2 3.5
Agriculture, livestock,forestry
&fisheries 1.0 3.4 9.9 1.6 1.3
Mining&quarrying 2.1 1.3 4.4 1.1 2.3
Manufacturing 7.3 5.1 4.5 3.6 4.8
Electricity,gas&watersupply 8.0 8.0 7.7 7.3 9.9
Construction 9.2 5.1 1.3 0.1 1.0
Trade,hotels&restaurants 6.4 5.0 5.7 5.8 5.3 Transport&communication 10.0 8.7 7.8 7.2 6.1 Finance,rental&businessservices 5.4 5.0 2.9 2.9 2.4
Services 1.9 2.0 2.3 1.3 1.6
Quarter-on-quarter
GDP –0.1 2.2 –0.7 1.8 0.2
Agriculture, livestock,forestry
&fisheries –4.3 5.9 –12.5 14.7 –4.6
Mining&quarrying –1.3 2.0 2.2 –1.7 –0.2
Manufacturing 0.9 1.8 2.5 –1.6 2.0
Electricity,gas&watersupply 4.0 3.3 2.5 –2.5 6.4
Construction 0.0 0.1 0.7 –0.7 0.9
Trade,hotels&restaurants 1.5 1.9 1.5 0.7 1.0 Transport&communication 0.6 2.1 3.2 1.2 –0.5
Finance,rental&businessservices 1.1 0.7 0.8 0.3 0.6
Services 1.1 0.2 –0.1 0.1 1.4
approved by it declining drastically from its level in 2000. For the period January–September,realisedforeignin -vestmentwas$1.8billionin2001,while realiseddomesticinvestmentwasRp5.3 trillion,bycomparisonwith$8.2billion andRp20 trillion,respectively,forthe sameperiodin2000.
Another causefor concern over the businessclimateisreflectedintheinven -tories(change instocks) componentof expenditure onGDP, whichshowstwo consecutivequartersofsharprisesdur -ingthefirsthalfof2001.Thissuggeststhat demandhasturnedouttobe less than producersexpected,andimpliesthatpro -ductionmay needtobecut ifstocksof unsoldgoodsarenottobecomeexcessive. Ontheexternal front,exportswere not abletomaintaintherapid8%growthre -corded in thefirst quarter, slowing to roughly match the growth rate of the
economyas a whole.Nevertheless, ex -portscontributedwelltooverallgrowth on ayear-on-yearbasis, atsome13.5%. Importgrowthwasstagnantduringthe firsthalfof2001,andafurthersharpdrop of10.6%inthedollarvalueofmerchan -diseimportswasreportedinJuly.Imports ofintermediateandcapitalgoodsforthe first semesterof2001contracted by 9% and4%,respectively,relativetotheirsec -ondsemester2000levels,providingfur -ther evidence ofa slowing of business activityandinvestment.
Theoutlookfortheexternalsideover therestof2001remainsbleak.Initially, thegovernmentprojected7.5%growth in non-oil and gas exports. But it has scaledbacktheforecastto2–3%owing to theeconomic slowdown inthe US, which in turn has adversely affected othermajortradingpartnersofIndone -sia, especially Japan. The July export
TABLE1b GDPGrowthbyExpenditure (%)
Jun-00 Sep-00 Dec-00 Mar-01 Jun-01
Year-on-year
GD P 5.2 4.4 5.2 3.2 3.5
Privateconsumption 3.3 4.0 4.7 5.9 4.8
Governmentconsumption 0.3 11.7 12.1 6.0 5.7
Investment 20.7 22.3 15.8 17.5 17.9
Changeinstocks 384.3 402.8 –60.1 24.7 23.9
Exports 21.2 14.1 14.2 15.4 13.5
Imports 3.9 20.1 44.2 39.3 29.7
Quarter-on-quarter
GD P –0.1 2.2 –0.7 1.8 0.2
Privateconsumption 1.2 1.2 1.2 2.2 0.2
Governmentconsumption 4.1 –5.5 8.2 –0.4 3.8
Investment 4 3.4 2.6 6.4 4.4
Changeinstocks 41.2 –46.1 –42.7 186.1 40.3
Exports 5 2.3 –0.9 8.3 3.3
Imports 7.5 11.8 16.6 –0.5 0.1
datafromtheCentralStatisticsAgency (BPS)indicateadeclineinthetotalvalue ofnon-oilandgasmerchandise exports toseveralkeytradingpartners.Thehead oftheNationalAgencyforExportDe -velopment(BPEN) hasindicated that exportershaverevisedtheir2001export targetsdownwardsfollowingtheterror -istattacksontheUS(JP,21/9/01).
Figure2providesfurtherevidenceof volatility in the production or sales of threekeyproductsduringthelastfew monthsoftheWahidpresidency.Motor -cycle salescontinued their impressive expansion, while car sales fell back after a remarkablejumpin May–June. Cementproduction alsotapered offin JulyandAugust,suggestingthatthein -creaseinconstructionactivityintheJune quartermaynothavebeenmaintained.
Theshort-termoutlookremainsvery uncertain.Domestic political concerns haveabatedwiththechangeingovern -ment,butuncertainty intheworldmar
-ket heighteneddrastically intheafter -mathoftheterrorist attacksintheUS. Confidenceonthepartofforeigninves -torsinparticularcanbeexpectedtobe relativelyfragileforthelastquarter.At thesame time, uncertainty in both re -gional and global markets is likely to grow.Underthesecircumstances, Indo -nesia’s economy will probably remain vulnerable fortherestof2001,andthe growthrate fortheyearis likelytobe nearthelowerendofthetargetrangeof 3–3.5%statedintherevised2001budget.
TrendsintheM onetaryIndicators
ExchangeRate.Afterhoveringataround Rp11,100–11,400/$duringthelasttwo monthsofAbdurrahman Wahid’spresi -dency, the rupiah strengthened mark -edly to Rp 8,200/$ within a period of threeweeksaroundthetimeofhisdis -missal (figure 3),reflecting a surgeof positive sentiment following the ap -pointmentofMegawatiaspresidentin
FIGURE2 CementProductionandCarandMotorcycleSales (January2001=100)
Source:DanareksaResearchInstitute. 0
5 0 1 0 0 1 5 0 2 0 0
Jan-01 Feb-01 Mar-01 Apr-01 M ay-01 Jun-01 Jul-01 Aug-01
lateJuly.Thisstrengthening lastedonly afewweeks,however.FromearlySep -tember the rupiah again began to weaken,especiallyafterthe11Septem -ber terrorist attacks. The attacks also forced theindefinite postponement of the Paris Clubmeeting where the re -schedulingof$2.8billionofIndonesia’s debtandthepossibility ofnewborrow -ingswere tohavebeen discussed.Un -certaintyover the Paris Club meeting and,inparticular,concernoverthestate oftheUSeconomy,areweighingheav -ilyontherupiah.
ThegovernorofBankIndonesia(BI) has expressed thebank’s commitment todoeverythinginitspowertoprevent therupiahfromslidingevenfurther(JP, 23/9/01).Intherevisedbudgetfor2001 thegovernmenthastargetedanaverage exchangerateofRp9,600/$,whichim -pliesthatthelocalcurrencywouldneed to stabilise at aro und Rp 8,400/$ throughoutthelastfourmonthsofthe
year.However,bymidOctobertheex -change rate was above Rp 10,000/$. Giventheuncertainty inbothdomestic andinternational markets,keepingthe rateataroundRp8,400/$islikelytobe verydifficult.
Inflation. Inflationary pressure re -mainedstrongthroughoutthefirsthalf of2001 (figure 4).The consumerprice index (CPI)increased by 2.1% in July alone,bringingyear-on-yearinflationto 13.0%. Aslight fall in theCPI was re -portedinAugust,butthiswasmorethan reversedinSeptember.Theinflationrate for the year to September 2001 was 13.0%,whichmaybecomparedwiththe government’stargetof9.3%forthecal -endaryear.It willbe surprising ifthis targetcanbemet.
InterestRates. DeputyGovernorofBI MirandaGoeltom (Goeltom 2001) has madetheobviouspointthatfurtherin -creases in theBI Certificate (SBI)rate, togetherwithsalesofforeignexchange
FIGURE3 RecentExchangeRateMovements (Rp/$)
Source:PacificExchangeRateService.
0 2,500 5,000 7,500 10,000 12,500
inthemarketbyBI,arenecessaryifthe basemoneytargetsaretobemet.Inthe absenceofsuchactionsitremainstobe seenwhethertheIMF,asinternational lenderoflastresort,willcontinuetoex -erciseitsownequivalentof‘regulatory forbearance’ inrelationtoBI’srepeated failuretocomplywiththemonetarytar -getstowhichitisnominallycommitted. Asmattersstand,however, BI’sability to sell dollars in the market is con -strainedbythecommitmentintheLOI tomaintainitsholdingsofinternational reservesatroughlytheircurrentlevel— aconstraintthatmakeslittlesenseinthe context ofa floating exchange rate re -gime.This suggests that interest rates willhavetobearmostoftheburdenof meetingthemoney growthtarget. SBI rates have continued to increase throughout2001, rising to nearly18% perannuminSeptember.
BaseMoney.IntheyeartoSeptember basemoneygrew bysome19%, arate thathasbeenmaintainedsincethesec -ondquarterof2000,andis well inex -cessofthattargetedinthemostrecent (and all preceding) LOIs.The volume grewtoaroundRp115.7trillion,about Rp5trillionmorethaneventhenewtar -getofRp110.5setinthelatestLOI.Itis notsurprising thatinflation and inter -est rateshavebeenincreasing steadily inthesecircumstances, anditisdifficult to seehow such rapid money growth can be reconciled with BI’spurported commitmenttopreventing furtherde -preciationofthecurrency.
FirstSemester2001BudgetOutcomes
Revenue. Atleasthalfofthetaxrevenues projectedintherevisedbudgetfor2001 were collected in the first semester.By contrast,totalrealisednon-taxrevenues
FIGURE4 MonetaryIndicators (%p.a.,Rptrillion)
Source:Asfortable1a. 0
5 1 0 1 5 2 0
Sep-00 Dec-00 M ar-01 Jun-01 Sep-01
Inflation& interestrates
0 4 0 8 0 1 2 0 1 6 0 Base money
amountedtoonly 43% ofthetargetfor thewholeyear.Of particularconcernis theshortfallinnaturalresourcerevenues, whichstoodatonly44%atthehalfway mark.Thisoutcomeisdominatedbythe major component,oil, revenues from whichamountedtoonly37%ofthefull yeartargetinthefirst semester.On the otherhand,revenues from natural gas werewellaheadoftarget,at69%.Thetwo otherimportantcategoriesofnon-taxrev -enueswerealsowellbehindtarget:profit transfersfromSOEs(state-ownedenter -prises)stoodatonly31%ofthecalendar yearprojection,whileothernon-taxrev -enues,whichincludeassetrecoveryand privatisationproceeds,amountedtojust 40%(table2).Revenuesasawholeforthe firstsemestertotalledabout52% ofthe fullyeartargets.
Expenditure. Ontheotherhand,real -isedtotalexpendituresforthefirstse -mesterreached onlyabout46% ofthe projectedfullyearamounts.Currentex -penditureasawholewasclosetohalf ofthecalendaryeartotal,althoughthere is considerable variation among sub -categories.Forexample,expenditureon wages and salaries was considerably higherthanbudgeted,aswereinterest paymentsonbothdomesticandforeign debt.Ontheotherhand,subsidieshave beenloweredsignificantly bycompari -sonwiththeearlierprojections.Perhaps themajoraspectofconcernhereisthe severeshortfallindevelopmentexpen -ditures,which amountedto only29% ofthefullyearprojectedamountsinthe first semester. Also of interest is the drasticshortfallinnaturalresourcerev -enuesharing,whichamountedtoonly 16%ofthefullyeartotal.Thissuggests that earlier concern on the part of re -gionalgovernmentsaboutwhetherthey would in fact receive what they had beenpromised underthis category of funding(Pangestuand Goeltom 2001: 161)werewellfounded.
OverallBalanceandFinancing. Thefirst semesteroverallresultwasasmalldefi -citthatamountedtoonly14%ofthefull yearprojection.Inrelationtothefinanc -ingofthedeficit,allamountswerefar belowtheone-semesterpro-ratedbud -getamounts.Privatisation effortsfailed togenerateanyrevenueatall,whileas -setrecoveriesbyIBRAstoodatlessthan 42%ofthefullyearamounts.Newfor -eignfinancingofprojectsandprograms wasalsofarbelowexpectations, at27% and 16%, respectively,of the fullyear projection.
THE2002BUDG ET
TABLE2 Budgetsfor2001and2002 (Rptrillion)
2001 SemesterI2001 2002
Revised %of Realised %of Budget %of
GDP Revised GDP
Totalrevenue 286.0 19.5 147.9 51.7 289.4 17.1 Taxrevenues 185.3 12.6 105.0 56.7 216.8 12.8 Domestictaxes 174.3 11.9 99.5 57.1 204.2 12.1
Incometax 95.0 6.5 56.3 59.2 101.9 6.0
Valueaddedtax 53.5 3.6 30.9 57.8 69.9 4.1
Other 25.8 1.7 12.3 47.6 32.4 1.9
International tradetaxes 11.0 0.7 5.5 50.4 12.6 0.7 Non-taxrevenues 100.7 6.9 42.9 42.6 72.6 4.3
Naturalresources 79.4 5.4 35.2 44.3 55.9 3.3
Oil 57.9 3.9 21.6 37.3 37.9 2.2
Gas 17.4 1.2 12.0 69.2 13.6 0.8
Other 4.2 0.3 1.6 37.5 4.3 0.3
ProfittransfersfromSOEs 9.0 0.6 2.7 30.5 8.2 0.5 Othernon-taxrevenues 12.3 0.8 5.0 40.4 8.6 0.5
Totalexpenditure 340.3 23.2 155.4 45.7 332.5 19.6 Centralgovernmentexpenditure 258.8 17.7 117.2 45.3 242.1 14.3 Routineexpenditure 213.4 14.5 104.1 48.8 195.0 11.5
Personnel 38.2 2.6 21.7 56.9 40.7 2.4
Goods&services 9.9 0.7 4.8 48.6 11.5 0.7 Interestpayments 89.6 6.1 51.0 56.9 87.0 5.1
Domestic 61.2 4.2 33.6 54.9 59.6 3.5
External 28.4 1.9 17.4 61.2 27.4 1.6
Subsidies 66.3 4.5 26.2 39.6 46.2 2.7
Petroleum 53.8 3.7 23.8 44.2 32.3 1.9
Non-petroleum 12.5 0.9 2.4 19.5 13.9 0.8
Other 9.4 0.6 0.4 4.0 9.5 0.6
Development expenditure 45.5 3.1 13.0 28.7 47.1 2.8 Rupiahfinancing 21.7 1.5 4.7 21.8 22.8 1.4 Projectfinancing
withforeignloans 23.7 1.6 8.3 35.0 24.4 1.4 Balancingfunds(toregions) 81.5 5.5 38.2 46.9 90.3 5.3
Naturalresource
revenuesharing 20.3 1.4 3.2 15.6 23.2 1.4 GeneralAllocationFund(DAU) 60.5 4.1 35.1 58.0 66.4 3.9 SpecialAllocationFund(DAK) 0.7 0.0 0.8 0.0 Overallbalance
(revenue–expenditure) –54.3 –3.7 –7.5 13.9 –43.0 –2.5
Financing 54.3 3.7 12.2 22.6 43.0 2.5
Domesticfinancing 34.4 2.3 11.3 32.7 25.4 1.5
Privatisation proceeds 6.5 0.4 4.0 0.2
Assetrecoveries 27.0 1.8 11.3 41.7 21.5 1.3 Governmentbondissuance(net) 0.9 0.1 0.0
Foreignfinancing(net) 19.9 1.4 1.0 4.8 17.6 1.0
Projectloan 23.7 1.6 6.3 26.6 24.4 1.4
Amortisation offoreigndebt –20.2 –1.4 –9.9 49.3 –41.5 –2.5
Programloan&rescheduling
offoreigndebt 16.3 1.1 2.6 16.1 34.7 2.1
Revenue. Totalrevenueisexpectedto be around Rp289 trillion, or17.1% of GDP.About75%ofthetotalrevenueis expectedtocomefromtaxes,ofwhich domestictaxes willcontributecloseto 95%. Income tax continues to be the mostsignificant sourceofdomestictax (ataround50%).Thenextlargestsource ofdomestictaxisthevalueaddedtax, which is expected togeneratearound 34%ofthetotal.Thenon-taxrevenues willbederivedmainlyfromnaturalre -sources, whichwillcontribute around Rp56trillion(77%ofnon-taxrevenues). Thelargestcontributors areoilandgas, ataround68%and24%oftotalnatural resource revenues, respectively. Profit transfersfromstateenterprises arepro -jected to contribute Rp 8.2 trillio n, whichseemsoptimistic inview ofthe shortfallinthefirstsemesterof2001.
Targetedtaxrevenueisupbyaround Rp32trillion,or17%,relativetothere -vised2001budget.On theotherhand, revenuesfromoilandgasarebudgeted tofallsignificantly,byRp24trillion.On balance,totalrevenuesare expectedto riseonlymarginallybyabout1%—im -plyingafallofabout7%inrealterms.
Expenditure. Expenditurein2002is targetedtofallbelowtherevised2001 expenditurelevelby about Rp 8 tril -lion.Thereductionisconcentratedon currentexpenditures,while develop -mentspendingisprojectedtoincrease slightly(in nominalterms).Asin the revised 2001 budget, around half of development expenditure will be fi -nanced throughforeignloans.Asfor thefiscaldecentralisationcomponent o f e x p en d i tu re , b al a n c in g f u nd s (transfers to lower levels of govern -ment)willincreasebynearlyRp9tril -lion.Over65%oftheincreasewilltake the form of the General Allocation Fund(DanaAlokasiUmum,DAU).
Twocomponents of the current ex -pendituresidearebudgetedtofall.In
-terestpaymentsondomesticandexter -nal debtwilldecline intotalbyRp2.6 trillion. Of much greatersignificance, however,is thedeclineinexpenditure on subsidies on petroleum products, whicharetobecut sharplybyaround Rp21trillion,orroughly40%.Thiswill forcethegovernmenttoraisefuelprices byanaverageof30%(beginninginJanu -ary2002).Despitethis,theprojectedfuel subsidywillremainrelativelyhighatRp 32trillion,equivalenttoaround68%of total development expenditure. Simi -larly,electricity tariffswillalsohaveto increaseby3–4%ineachquarterof2002 togenerateatotalsubsidyreductionof around1.9%.Inabidtolessenthebur -den on low-income people resulting fromthesekeysubsidycuts,compensa -toryprogramswillbeimplemented.In particular, subsidieson food products will increase by morethan Rp2.3 tril -lion,orbyover90%.
Foursectorswerelistedaskeytargets for development spending in the2002 budget:Agriculture, Forestry, Marine andFisheries;Education,NationalCul -ture,Youth and Sport; Social Welfare, Health and Women’sEmpowerment; and Transportation, Meteorology and Geophysics. Togethertheseaccountfor more than 50% of total development expenditures.
Overall Balanceand Financing. The budget deficit will be around Rp 11 trillion less than in 2001, or 2.5% of GDP. About 59% of this will be fi -nanced domestically, from privatisa -tionandassetrecoveriesbyIBRA.The latterisexpectedtocontributenearly 85%ofthetotal.
AretheKeyAssumptions forthe2002BudgetR ealistic?
(Kompas,17/9/01).Thefirstwasthecur -rent slowdownof major worldecono -mies,inparticulartheUS,whichseemed verylikelytobeamplifiedby thenew waroninternational terrorism.Thesec -ondwasthatthe2002budget appears tobecontractionary ratherthanexpan -sionary.Theplanneddeficit issmaller, andnearlyallcategoriesofexpenditure (includingtheprovisionofsubsidiesand transfers to the regions) will fall as a percentageofGDPbycomparisonwith therevised2001budget.
Itis of immense importance, there -fore,todoeverythingpossibletoraise private sector confidence and willing -nesstoinvest.Unfortunately,however, theUS-ledattacksonAfghanistan have heightened uncertainty in Indonesia. Therehavebeendemonstrationsatthe US embassyin Jakarta and against a numberofUSbusinesses. Atthe Japa -nese consulate general in Makasar, South Sulawesi, staff were forced to lowertheJapaneseflagandsomeprop -ertywasdestroyed.Abombwasdeto -natedataUS-franchisedbusiness,and anotherwas found at the office of an Australianinsurancecompany,bothin thesamecity.
The gloomy outlook is shared by othereconomiesintheregion.Singapore has revised its 2001 growth projection froma1.5%expansiontoa3%contrac -tion (Straits Times, 11/10/01),while a recentforecastbyMorgan Stanley and Co.hasreviseddownwardtheprojected overallgrowthrateforAsiancountries, excluding Japan, by 1% for 2001 and 2002(Business Week,22/10/01).Global consumerconfidencehasalsodeclined sharply. Underthe threat of potential globalrecessionatleastthroughthefirst halfof2002,thedownwardrevisionto 4% growth for Indonesia therefore seemsrathertoooptimistic.
MonetaryIndicators. Differentexpla -nationshave beenofferedfor Indone
-sia’shighandincreasinginflation.De -preciation of the rupiah and upward adjustment of government-controlled pricesforkeycommoditiessuchasfuel and electricity have frequently been blamedbybothBIandBPS.Thereisalso a view that a wideningof thebudget deficitcannotbefinanced‘withoutlead -ing toa serious further increaseinin -flationary pressures’(Singh 2001).But therehasbeensurprisinglylittleempha -sis—atleastingovernmentcircles—on the ro le o f excessive base m oney growth,whichisentirelyattributable to BI’spolicies.
By contrast, McLeod (2001) argues implicitlythatthereisnoreasonwhythe targetinflationlevelof8%for2002can -notbemet,providedBIstickstothetar -getedgrowthrateforbasemoneyinthe LOI.Thiswouldruleoutthepossibility offinancingthebudgetdeficitbymoney creation,whichispresumablythesource ofSingh’sconcern.Indeed,lowerinfla -tioncouldbeachievedbyreducingthis growthratefurther.Unfortunately,how -ever, BI’s track record formeeting the LOI commitments ispoor, and it has shownin therecent pastthat itis pre -pared to trade off looser monetary conditions—and,therefore,higherinfla -tion—in thehopethat thiswill hasten recoveryoftheeconomy,avoidfurther weakeningofthebankingsystem,and contributetoasmallerbudgetdeficitby wayoflowerinterestratesonbankre -capitalisation bonds.Infact,theoppo -site is likely to be true. Slower base moneygrowthwilllowerinflation,soon reducinginflationary expectations and thusencouraging adeclineinnominal interestratesandastrengthening ofthe rupiah.Indonesia’sexperiencefrommid 1998tomid1999showsthatthispolicy is quitecompatible withanexpanding economy.
-creasefuelpricesandelectricity tariffs inlate2001andearly2002.Manycom -mentators take theview that this will addtoinflation.Indeed,increasesinfuel prices appearto have been largely re -sponsible for the large mid-year in -creases inthe transport component of the consumer price index. However, pricecontrolshaveneverbeensuccess -fulasananti-inflationmechanism,and theupwardadjustmentofadministered pricesshouldhavelittlelastingimpact on inflation, provided that money growth is keptunder control. On the otherhand,ifBI respondstoincreases inadministered pricesbyincreasingthe moneysupplytooffsettheirimmediate negativeimpactonrealmoneybalances, inflationisverylikelytoexceedthefore -castlevel.
Likewise, many take the view that increasingpoliticalinstability andsecu -rityconcernswill causefurtherrupiah depreciation and that this will add to inflation.Again, in reality it is only tradablespricesthatwouldbeincreased inthisscenario.Providedthatthemoney supplyisnotincreased,realmoneybal -ances will fall, and tradables prices wo uld hav e to fall in order to re -establishequilibrium inthemarketfor money.Inotherwords,therewouldbe achangeinthepriceoftradablerelative to non-tradable goods and services, withoutanyimpliedincreaseintheav -eragepricelevel.
Thusitwouldseemthatfurtherem -piricalstudiesofinflationareneededif thereistobeaclearerunderstandingof itscauses.Inturn,this shouldmake it possibleforIndonesiatobringinflation downpermanently tomuchlowerlev -elsthanthoseexperienced recently.
FinancingComponents. Theburdenof amortisation of public sector foreign debtwillbesubstantial nextyear,atap -proximately twicethe2001amount,ac -countingforaround97%oftheplanned
budgetdeficitofRp43trillion.Tokeep thedeficitto2.5%ofGDP,thegovern -mentisdependingheavilyonitsability to generate new project and program loans,andtonegotiatetherescheduling of maturing foreigndebt. Inturn, this will depend onits ability toretain the goodwill of the international commu -nity,whichseemsincreasingly indoubt astheUS-ledwaroninternational ter -rorism results inthreatsto US citizens and businesses resident in Indonesia, andcallsforIndonesiatocutitstieswith the US. The government’ssuccess, or lack of it, in meeting its LOI commit -mentswillalsodeterminewhetherfur -therloanswillbeforthcoming fromthe IMF,andwhetherIndonesia’screditors willbewillingtorescheduledebtrepay -ments and provide new loans. At the timeofwriting,therewerefewgrounds foroptimisminrelationtoeachofthese questions.
NEWLETTEROFINTENT
Aftereightmonthsofdelay,thegovern -mentsignedanewLetterofIntentwith the IMFin August. The last LOI was signedinSeptember2000,withanother supposed to have been signed in De -cember2000.Thegovernment’sfailure tofulfilseveralofitspreviouscommit -mentspromptedtheFundtofreezethe subsequent$400 million loan tranche. Thelatestagreementpavesthewayfor theIMFtodisbursethistranche,andfor the Paris Club o f credit or natio ns (whoseplannedmeetinginSeptember wasdelayedindefinitely followingthe terroristattacksintheUS)todiscussthe rescheduling of some $2.8 billion of publicsectorforeigndebtduetomature thisyear.
ThenewLOI(dated27/8/01)covers six key areas: overall macroeconomic policyobjectives;fiscaldecentralisation; bankingsectorreforms;restructuringof bankingand corporate assets, particu -larlythose under IBRA;legalreforms; and reforms in the public sector and other key sectors in the econom y (www.imf.org).Thereareindications in thenewLOIthattheIMFhasagreedto ease some targets in response to the president’srequestthatdonorcountries andinstitutions allow Indonesia some ‘breathing space’ in fulfilling its debt obligations. Theinflationtargetfor2001 hasbeenraisedtoarangeof9–11%from 9.3%in2000.EstimatedGDPgrowthfor 2001 is down from 4.8% in 2000 to 3–3.5%. On the other hand, the base moneytargetgrowthratehasbeenset at12.5%p.a.,considerably lessthanthe 19%growthrecordedintheyeartoAu -gust2001. The new LOI also shows a shiftin the IMF approach away from micro-management to broader macro guidelines.
InitsremarksduringtheCGI(Con -sultativeGrouponIndonesia)meeting inApril,theIMFexpresseditsobjection
toaproposalthatthegovernmentmight issue bonds using future natural re -source revenuesascollateral. No such proposalistobefoundinthenewLOI. Afurtherdemonstration ofthegovern -ment’seffortstoregainIMFtrustisevi -dentinitscommitmenttorevisingthe lawonBItoensureastrong,independ -ent and accountable central bank (al -thoughithasbeendecidedthatatleast afurthersixmonthsisneededtostudy the options for revision of the central banklaw).BIhadbeenexposedtovari -ousformsofintervention underAbdur -rahmanWahid,bothfromthepresident directlyandthroughvariousministries. Amongthemostimportantelements ofthenewLOIarethoseconcerningcor -poraterestructuring andlegalreforms, and public sectorand other structural reforms.TheLOImentionsanumberof specificmeasuresalreadytakeninthese areas,suchastheappointmentof13new
adhocjudgestodealwithcasespending inthe corporate restructuring process, amendmentofthebankruptcylaw,and preparation of a comprehensive blue -printforreformofthecommercialcourt. Asforpublicsectorreform,severalau -ditsonkeygovernmententerprises (the airline Garuda, portauthority Pelindo II, toll road operator JasaMarga, tel -ecommunications providerTelkom,and plantationenterprisePN-IV)havebeen completed.Thesuccessofsuchreforms iscrucialtoeconomicrecovery.Doubts remain,however,astowhetherMega -wati’scabinetwill be abletooverhaul variousagenciesthatarestilldominated bycorruptofficials.
PRIVATIS ATIONOFS TATE
-OWNED ENTERPRISESAND
for State-Owned Enterprises, Laksa -manaSukardi.Withbothoftheseport -folios becoming its responsibility, his ministryisnowclearlyoneofthemost importantandinfluential. Bankrestruc -turing is the responsibility of IBRA, whichhithertohasbeenunderthecon -troloftheMinistryofFinance,andthe legalaspectsofitstransfertoadifferent ministryare still unresolved. There is someconcernthattimeandeffortmight bewastedindrawingupadecreetofor -maliseIBRA’stransfer,bearinginmind thattheoriginalintentionwasforitto bewoundupin2004.2 Thereisalsocon
-cern thatthis move may create addi -tional bureaucratic red tape. On the other hand,theprocess of privatising stateenterprises andthatofsellingna -tionalisedbanks,non-performingloans, andprivatecompaniessurrendered by defaultingborrowers are basically the same,so itmakessense forbothto be handledbyasingleoffice.Laksamana’s background in commercial banking wouldseemtofithimwellforthejob.
There are around 150 state-owned enterprisesunderLaksamana’sministry. Less than 10% of these are profitable. The rest are heavily debt ridden,and someareinfactunderthemanagement ofIBRA.ThecaseoftheStateElectricity Company(PLN)exemplifies thekinds ofproblemsfacedbymanystate-owned enterprises inIndonesia.InJune2001, aftermonthsofdebate,thegovernment finally approved the restructuring of around Rp 34 trillion of PLN’s debt, Rp29trillionofwhichwasconvertedto equity(JP,21/6/01).Withoutanydebt restructuring, PLN would probably have collapsed into bankruptcy;even withtherestructuring itslossfor2001is expectedtobearoundRp22trillion(JP, 12/1/01).OnesourceofPLN’sproblems isthepowerpurchasecontractsitsigned with27independent powerproducers (IPPs)in themid 1990s,whichare de
-nominatedinUSdollars(JP,12/1/01). Underthese contracts, PLNis obliged tobuywhateverpowertheIPPsgener -ate,atafixeddollar-denominated price, regardless of the level of market de -mand.Duringtherecentfinancialcrisis, PLNhas had tocope with a largede -cline in demandfor electricity, mean -while having to continue to purchase powerfromtheIPPsatfarhigherprices becauseofthemassivedepreciation of the rupiah,while the government has prevented it from passingon its high coststoconsumers.
Nevertheless, thecurrentpoorfinan -cialconditionofstateenterprises isnot a valid reason for the governmentto postponetheirprivatisation, theaimof whichisnotmerelytogeneraterevenue in the short term but also to improve theirefficiencyinthefuture.Itisnotonly the clumsy use of state enterprises to provide hidden subsidies to various groups in the community that causes themtomakelosses,butalsotheirinef -ficientandoftencorruptmanagement. Privatisation shouldresultinmorepro -fessionalmanagement;itwillalsomean thatanyinternalcorruptionwillnotbe attheexpenseofthegeneralpublic.The relevantquestioniswhetherthepresent potential sale value—which is the presentvalueofexpectedfutureprofits underprivateownership—exceedsthat understateownership,notwhetherthe salevaluemightincrease atsometime inthefuture.Thustowaitforthestate -ownedenterprisestobecomeprofitable, such that their sale value becomes higher, misses thepoint that it ispre -ciselythefactthattheyarestateowned that in practice tendsstrongly to pre -clude them from making reasonable profits.
asubsidiaryofTelkom,isestimatedto be worth $3 billion (Tempo, 27/8/01). Anotherpotentialprivatisation targetis PTSemenGresik.Atthetimeofwriting thegovernmenthelda putoption due on26October2001,whenitwouldhave todecidewhetheror notto sellits re -maining51% stake inthe company to theMexican-basedCemexIndonesia,at aprice ofaround $520million. Semen Gresik has two subsidiaries, Semen PadangandSemenTonasa,whichwere mergedintoSemenGresikin1995,and nowaccountforabout 40%ofIndone -sia’scementproductioncapacity.
Themainstumblingblock withthis dealrelatestoSemenPadang.Therehas been resistance fromvarious parties, especiallythelocalcommunitythrough its representatives in the provincial DPR,toforeignownershipoftheenter -prise.InAugust2001,giventhebudg -etary constraints facing the nation, Laksamanahintedthathewasconsid -eringexercisingtheputoption(JP,28/ 8/01).InlateSeptember2001,however, inresponsetopressurefromlegislators oppo sed to the sale , h is m in is tr y changeditsplansandaskedCemexIn -donesiatoextenditsdeadlineforexer -cise of the option (JP, 27/9/01). The SemenGresikcaseisanotherreminder ofthevulnerability ofminorityforeign shareholdersinstateenterprises (CSIS 2000;Dick2001).
IBRA:RunningOutofTime
InJune 2001 PresidentAbdurrahman WahidappointedIPutuArySutaasthe newchairmanofIBRA,replacingEdwin Gerungan. Putu is IBRA’s sixth head since it was established in 1998.Each change was motivated by the need to hasten thesale of assetscontrolled by IBRA.The benefitof thesecontinuing leadership changes is questionable, however. Inthethird year ofits exist -ence,IBRA,whichbylaw istobe dis
-solvedin2004,hasonlymanagedtore -structure 30% of its non-performing loans and to sell 8% of its total assets (BisnisIndonesia,20/9/01;Tempo,27/8/ 01).Sister institutions inThailand and Koreahavesoldaround70%and45%, respectively, of the assets under their control. The independent accounting firm thatauditedIBRA’s financialper -formance to December 2000 gave the agencyaqualifiedopinionforasecond consecutive year(Gatra,25/8/01).
Tohelpimprovetheperformance of IBRA,KwikKian Gie,head oftheNa -tional Planning Agency (Bappenas) planstoestablisha‘super-micro’unitin hisofficetoevaluatevariousaspectsof IBRA’soperations,includingfindingthe right pricefor thegovernment’s share ofBankCentralAsia(BCA),whichithas undertakentosell. Itisdifficultto see whatpurposewillbeservedbyhaving Bappenas undertakesuch a function, sinceithaslittleexpertise insuchmat -ters compared with IBRA.If this plan comestofruitionitseemsdestinedonly togeneratemoreconflictandredtape.
OfficialsofIBRAwho arealready also serving on the board o f an IBRA -affiliatedcompanyarerequiredtoresign eitherfromthecompanyorfromIBRA. Anothermajorconcernhaslongbeen thelack oftransparency oftheMemo -randa of Understanding (MOUs) be -tweenIBRAandotherpartiesinvolved in the divestment process. This has manifesteditselfinvariousformsofcon -flict of interestand corrupt behaviour (Tempo,27/8/01). The divestment of BCA,thesaleofGuthrie’spalmoilplan -tation(PangestuandGoeltom2001:147, box1)andtheJakartaOuterRingRoad ProjectarecasesinwhichtheMOUsare regardedassuspect(IndonesianBusiness, 8/01).
Anotherconcernhighlighted bythe newIBRAchairmanis thehighcostof employingconsultants. Recentlyitwas discoveredthattheAssetsManagement Credit(AMC)unitalonehadsofarspent Rp 700 billion on consultants (Tempo, 27/8/01).In2000, IBRAspent around Rp235 billion on consulting fees—ad -mittedlymuchlessthantheRp638bil -lion it spent in 1999. At the moment, IBRA is withho lding payments to LehmanBrothersInc.andPTDanareksa Securities(twoofitsmainconsultants) intheamountof$27million.
Oneoftheimmediateprioritiesofthe presentIBRAmanagementis its crash programforthesettlementofsmalland medium-scalebusinessdebts.AsofAu -gust2001,thetotalprincipalofsmalland medium-scaledebtsis estimatedto be around Rp 3.5 trillion which, at only about3.2%ofIBRA’stotalloanportfolio, isofrelativelyminorimportance.
InthelatestLOIthegovernmentcom -mitteditselftodivesting51%ownership of both Bank Central Asia and Bank Niagain 2001. TheLOI statesthatthe saleofbothbankswilltakeplacelargely throughprivateplacementstostrategic investors,so astoensure thatthey at
-tractstrongpartners.In2000IBRAhad sold22.5%ofitsstakeinBCAthrougha publicoffering(McLeod2000:24–7);in Julyitsoldafurther10%.However,an attempttosellanadditional30%stake of BCA in the first semester of 2001 failed, apparentlybecause thebids re -ceivedweretoolow;IBRAcomplained that the30% stake was inadequateto attractstrategicinvestors.
Notwithstandingits commitmentto divestm ent of majority ownership sharesinthese banks,thegovernment stillsawitasnecessarytoseekapproval fromtheDPR.Persuadinglawmakersto agreeto51%divestmentratherthanthe previously approved 40% maximum becameoneofthefirsttestsofthenew cabinet. Only twodays after the new LOIwasannounced,anumberoflegis -latorsexpressedtheirunhappinesswith the magnitude of the stake to be di -vested. In September the DPR finally agreed tothenew 51% target,but im -poseda requirement thatthe sale pro -ceedintwo phases.Ineffect,only30% isnowtobesoldin2001,withtheaddi -tional21%tobe soldat someunspeci -fie d tim e in the future (Dow Jones Newswires,4/10/01).
Yetatthesametimetheyalsodoubted thatBCAwouldbebettermanagedby domesticinvestorswho, they argued, had proved largely incapable of run -ning suchbanks in thefirst place,re -sulting in the need for them to be recapitalised.
On theotherhandmany,including theIMF,haveexpressedthefearthatif healthybankslikeBCAarenotquickly divested,thegovernmentmayusethem to bailout other banks,which would create a moral hazard in the banking sector(JP,29/8/01).Itisaswell tore -callthat allof thestate banksbecame deeplyinsolvent duringthecrisis—as mostofthemhad doneonseveraloc -casionspreviously—andthecosttothe government has been considerably greaterthanthatofbailingoutthepri -vatesectorbanks.Toavoidthis,thesale ofBCAshouldthereforebeexpedited. Inrespect of theeconomicnationalist argumentforretainingdomesticown -ership ofBCA,it is importantto note thatifpotentialforeignbuyersareex -cludedfrom thesale ofits shares,the selling price isbound to beconsider -ably depressed—which is precisely whatopponentsofdivestmentprofess tobeconcernedabout.Moreover,dis -cussionoftherelativemeritsofforeign and domestic ownership should not ignorethefactthatboththelikelihood of futurebankfailures, andthe likely costofsuchfailurestothegovernment, decline,thelargerthemarketshareheld by foreign institutions. The latter are muchlessvulnerabletofailurebecause they have globallydiversified portfo -lios,andeveniftheymakelargelosses onlocaloperations, theirshareholders ratherthanthegovernmentcanbeex -pectedtobearthem.Reducingtherisk ofhavingtobailoutfailedbanksthus providesastrong argumentinfavour ofhavingalargeforeignpresenceinthe bankingsector.
There is little time left for IBRAto meetitstargetedrevenuecontributions forthe2001budget.Unfortunately,with the11Septemberterroristattacksinthe US andtheiraftermathinAfghanistan havingincreasedtheperceivedlevelof riskintheglobaleconomy,themajorfi -nancialinstitutions thathadbeenseen aspotentialstrategicinvestors inBCA maynotwishtocommitthemselvesto suchaninvestmentinthenearfuture.
CORRUPTION
Included inthetalks betweenIndone -siangovernmentrepresentativesandthe USgovernmentduringMegawati’sSep -tembervisittotheUSwasarequestfor assistancetodealwiththecountry’sfor -eign debt.Inresponse, theUS govern -mentpromisedtoassist,providedthat Indonesiashoweditsdetermination to eliminatecorruption(JP,23/9/01).Dur -ingthepresident’svisittoWashington, theWorld Bank president also offered greateraccesstointerest-freeloansifthe countrypushesaheadwithreforms,in -cludingfightingcorruptionandimprov -ing the judicial system (Strait Times, 22/9/01).
With the present corrupt and weak legalandgovernmentinstitutions, cut -tingbackcorruptionsignificantlywillbe oneofthetoughesttestsforMegawati’s government. Initsassessmentreportfor 2000anditsoutlookfor2001onthelevel of corruption, Indonesia Corruption Watch(ICW)assertsthatcorruptionhas become more open,and that the DPR and political partiesare now involved asinstruments ofmoneypolitics(ICW 2001;Dick2001).
-ing.Otherstateinstitutions implicated inthe report included theoil and gas company,Pertamina,whichaccounted forRp 3 trillion of the missing funds, andtheFinanceMinistry,whereRp1.3 trillion disappeared (Business Times, 27/9/01).
Oneapproachtocleaningupcorrup -tioncontinuestogain momentum:the work of the Audit Commission on WealthofStateOfficials(KPKPN).Law No.28/1999assignstoKPKPNrespon -sibility for investigating the wealth of stateofficials.3 Ithasalreadybegunto receivefinancial reports,and toassess the wealth of judgesand other high -rankingofficials.InlightofarecentSu -premeCourtrulingdeclaringunlawful thespecialJoint Team fortheEradica -tionofCorruption(TGPTPK),responsi -ble for investigating and prosecuting corruption in thecourt system,a new body,theAnti-CorruptionCommission, willtakeoverthisimportanttask(Tempo Interaktif,22/03/01).KPKPNisexpected tohaveinvestigated thewealthofsome 1,500 officials by December 2001,and another5,000bytheendof2002. Talks arealsocontinuingintheDPRaboutthe possibility of forming ad hoc courts to overseecorruptioncases,andamending LawNo.28/1999toraisethepenalties forgovernmentofficialsfailingtocom -plywiththelaw.
However,effortstoeradicatecorrup -tioncontinuetoberesistedandunder -mined by those who gain from it. In September the chairman of TGPTPK, AdiAndojo,resignedfromhisposition, frustratedovertheineffectiveness ofhis team.Commentingontheresignation, ChaerulImam,deputyheadofKPKPN, hasarguedthattheeffectiveness ofany official team with responsibility and authoritytoeradicate practices of cor -ruptionwillbeverylimitedifthecoun -trydoesnotoverhaulthewholesystem ofgovernment(TempoInteraktif,22/03/
01).Imam argued furtherthat corrup -tion can be found in every layer of government, from the centralgovern -mentdown tovillage administrations (kelurahan).
AfurtherblowtoIndonesia’salready tarnishedimageoccurredwhennewsof corruptpracticesintheDPRmadehead -linesinboththelocalandforeignpress in September. Controversy over the practiceofmembersreceivinggiftsin -tensifiedafterthediscoverythatalegis -lator had allegedly received a Rp 10 million traveller ’s cheque from a gov -ernmentofficial (box 3). This incident providedconfirmation oftheICWfind -ingsoncorruptpracticesintheDPR,and raisesaquestionabouthowsignificant thisfactorisinexplainingthedelaysre -sultingfromDPRobstruction ofthedi -vestment of banks by IBRA and the privatisation ofstateenterprises.
ECONOMICCONCERNSABOUT
REGIONALAUTONOM Y4
Manylocalgovernmentshaveexpressed concern over what they regard asthe inadequacyoftheDAU (GeneralAllo -cationFund)transfersfrom thecentral government (SMERU 2001b).5 Most complain thattheDAUwilllargely be absorbedbyroutinebudgetaryexpendi -ture,leaving aninadequateamountto coverdevelopmentspending.Forexam -ple,GorontaloDistrict,withinGorontalo province,6 willreceiveRp149billionof DAU in 2001,which is more than ad -equatetocoveritsroutineexpenditure ofRp128billion,buttheremainingRp 20billionislessthanthetotaldevelop -mentfundsthatwereallocated toitin the2000budget(SMERU2001b).
governmentsingeneralhavebeenintro -ducingmanynewrevenueraisingregu -lations. Saad (2001) found that local governmentsinthedistrictsofBolmong, Gorontalo,Minahasa,Karo,Simalungun andDeliSerdangbetweenthemhadis -sued 146 new local regulations since January2001,hopingtogenerateanin -creaseof 90–120% in local revenue in
2001 compared withits level in 2000. Someofthesenewlocalleviesandtaxes are clearly inconsistent with Law No. 18/1997 on Taxation, which limits the kinds of taxes and levies that may be collectedintheregions.
TheMinisterofHomeAffairshasin -dicatedthatLawNo.34/2000onLocal Regulations for Taxes and Levies calls
BOX3 ‘WET’AND‘DRY’COMM ISS IONSATTHEHOUS EOFREPRES ENTATIVES
ReportersfromtheJakartaPostfoundthatmembersoftheDPRseemedada -mant, whenconfronted with an alleged briberycase, that accepting gifts, cashandotherbenefitswascommonplace. Legislators saidthatthepractice was prevalent:‘practically everybody didit’,knowing thatthey were be -yondthereachofthelaw.
Controversy overthepracticeofreceivinggiftsintheDPRintensified af -teranallegationinSeptemberthatalegislatorhadreceivedaRp10million traveller ’schequefromahigh-rankinggovernmentofficial.Alegislatorfrom CommissionIIIonForestryandAgriculture saidhewasgivenanamountof moneyimmediately aftercompletion ofdeliberations ona bill onplanta -tions.‘We convenedfor deliberations onthebill fordaysandnights.It is normalformetoacceptcash’,hetoldtheJakartaPost.Anotherlegislatorsaid thattheamountreceivedbyeachlegislatordiffered.‘PerhapsbecauseIam outspokenIreceiveonlyalittle’,hesaid.
DissidentformerPBBpartyfigureandparliamentarian,HartonoMardjono, whohadpubliclyopposedthepracticeintheDPR,acknowledgedthatbrib -ery wasrife. ‘Iam very muchawarethat someofmy colleagues have re -ceivedbribes’,hesaid.Thosecommissions considered‘wet’,Hartonosaid, wereCommissions III,IV,V,VIIIandIX,allofwhichdealtwithsupervisory tasksoverthebanksandstateenterprises. ‘Wet’commissions arethosein whichbriberyiscommonpractice;in‘dry’commissionsitisnot.Otherforms ofbribery,hesaid,includedtheprovisionofvariousbenefits,projectconces -sions,andgiftsforlegislators andtheirfamilymembers.
Manyblamethecurrentproportional representation system,whichdoes notallowthepeopletochoosetheirownrepresentatives. Asaresult,candi -dateswhohavebeenappointedtotheDPRdonotfeelaccountable totheir constituents, andinsteadplacetheirloyaltywiththeirparties.‘Thesadthing isthatthereisnolawenforcement tostopthismisdeed.Legislators canac -cept bribeswithoutfear ofbeingcaught’,Hartonosaid.Theexisting 1999 politicallawdoesnotstipulatewhetheralegislatormayormaynotreceive gifts.
BOX4 FINESANDLEVIESPAIDWHENTRANS PORTINGORANGESFRO M
NOR THSUMATRATOJAKARTA
AtruckdriverwhoregularlytransportsorangesfromkabupatenKaroinNorth SumatratoJakartareportsthatatleast16truckweighingstationsandsev -eralotherlevycheckpoints havetobepassedalongtheroute.Thetablebe -lowshowsthenumberandamountofpaymentsthatneedtobemadeatthe weighingstations.Thesecondpartofthetableshowstheadditionallevies thathavetobepaidattheferryharbouratBakaheuni.
WeighingStations
Province No.of Payments Remarks
Stations
NorthSumatra 4 FineofRp5,000–10,000for
eachtonofexcessweight
Riau 2 Rp60,000,paidbyalltrucks, Theseleviesmustbepaid irrespective ofweight,plus bybothcomplyingand additionalroadlevies: non-complyingvehicles
Rp2,500(6-tontruck)
Rp3,500(8-tontruck)
Jambi 2 Rp60,000,paidbyalltrucks, plusadditionalroadlevies: Rp2,500(6-tontruck)
Rp3,500(8-tontruck)
SouthSumatra 5 FineofRp15,000foreach tonofexcessweight,plus additionalroadlevies: Rp2,500(6-tontruck)
Rp3,500(8-tontruck)
Lampung 3 FineofRp15,000foreach tonofexcessweight,plus additionalroadlevies: Rp2,500(6-tontruck)
forthecentralgovernmenttoconduct reviewsofnewlyintroducedlocallev -ies and taxes. These can beannulled iftheyarefoundtobeinconflictwith higher regulations or statutes, pro -vided that this process is completed within30days ofthe centralgovern -mentreceivingacopyoftheregional ruling in question (JP, 11/9/01). Al -thoughintendedtospeeduptheproc -essesofgovernment,thisprovisionis a ‘double-edged sword’: ina context wheremany hundredsof such regu -lations have been introduced within a short period, the ministry has not been able to keep pace, with the re -sultthatregulationsareapprovedby default.
ThechairmanoftheIndonesianCham -berofCommerceandIndustryhasvoiced hisassociation’sconcernoversome1,000 regionalrulingsthatareseriouslyham -pering investment (Kompas, 7/9/01). These additional levies and taxes are clearlyhavinganadverseimpactonthe localbusinessclimate(SMERU2001a),for example,onthedistributioncostofprod -uctsastheyaretransportedfromdiffer -entpartsofIndonesiatothemajorcities (box 4).The additionallevies andtaxes lowerreturnstoproducersandincrease costs toconsumers(Montgomery et al.
forthcoming).
The impact of mushrooming levies andtaxesontheinternalmovementof goodsis thesameasthatwhichwould BOX4 (continued) FINESANDLEVIESPAIDWHENTRANS PORTINGORANGES
FROMNORT HSUMAT RATOJAKAR TA
OfficialandNon-officialLeviesatBakaheuniFerryHarbour
LeviesandCharges Amount(Rp) Remarks
Stampfees 3,000 Illegalleviesbyportofficialsand Feetoraisethebarrier 3,000 privateextortionists (preman)
Premancharge 2,000
Feestogainearlydeparture 15,000 Tosecurepriorityboardingwhen thereisalongqueue
Quarantine 1,000 OfficiallevyattheGayamQuarantine Post
Agricultural producelevy 7,000 Officiallevyappliedtoalltypesof transportvehicles
Theestimatedvalueofan8-tontruckloadoforangesisRp14,400,000.Thetotalamount
paidoutintaxesandleviesis2–7%ofthetotalfarmgatevalue.
resultfromdeteriorationofthetransport infrastructure. The economy becomes more fragmented; business activity tendstoconcentrate inandclosetoma -jorcities;7 andruralareasretrogressto
-wardsubsistence production. Inshort, thepotentialgainsfromtradebetween isolatedruralareasandurbanareasare significantly diminished. Thus short -sightedlocalgovernmentsthatseetrans -portlinksasnothingmorethantargets for collecting additional tax revenue, andthatfailtoprotecttransportopera -torsfromextortionists andcorruptoffi -cials, run the risk of dissipating much ofthe progress that has beenmade in ruraldevelopment inrecentdecades.8
Yetitispreciselyatthistimeofcrisis thatruralareasareneededtogenerate employmentforworkersdisplacedfrom modernsectorworkinthecities. This, then,is apolicy issue ofmajorsignifi -cance,towhicharangeofresponsesis required.Inparticular,thecentralgov -ernmentmustensurethatfundstrans -ferredtolowerlevelsofgovernmentare sufficientforthefunctionsthatarealso transferred: surprisingasitmayseem,
thecurrentintergovernmentalrevenue sharingarrangementsseemtohavebeen workedoutalmostindependentlyofthe devolutionofgovernmentfunctions.
In addition, the Law on Taxation needstobe revised soastoencourage privatesectorentitieswhoseowninter -estsareatstaketochallengenewlocal regulationsincourtiftheyareinconsist -entwithhigherrankingregulationsand statutes.Thisshould be moreeffective than relying onthe overstretched bu -reaucracyintheHomeAffairsMinistry, which has little incentive toput effort intoreviewingsuchregulations asthey emerge.Admittedlythisalternative ap -proach needs to rely on a very inad -equate court system, but an essential aspect of Indonesia’s democratisation processisthatthegeneralpublicshould bemadeawarethatgovernments atall levelsalsohavetoabidebythelaw,from which it follows that private entities havetherighttomountlegalchallenges to these governments if they areper -ceivedtobeactingillegally.
22October2001
NOTES
* The author gratefully acknowledges valuable ass istance from Anw ar Nasution,RadenPardedeand hiscol
-leaguesatDanareksaResearchInstitute, AntonH.Gunawan,SudarnoSumarto and his colleagues at SMERU, Mari Pang estu, Chati b Ba sri and Iman Sugema.
1 AproposalinearlyOctoberbytheHead ofthe InvestmentCoordinating Board (BKPM)toputadraftlawbeforetheDPR thatwould reintroduce taxholidaysto encouragenewinvestment(BusinessIn -donesia,4/10/01),ratherthanattempting firstto obtain cabinet support, gives causeforconcern,however,andwillpro
-videanearlytestofhow wellthenew economicteamisworking.
2 ItremainsuncertainwhetherIBRAisto bewoundupasinitiallyscheduled.Parts
ofit,suchastheAssetManagementUnit, maycontinuetoexist.
3 Thisincludeskeymembersoftheexecu
-tive(fromthepresident,ministersand keyofficialsattheministriesandthecen
-tral bank anddirectors ofstate enter
-prises and banks, down to heads of districts),topmilitaryofficials,members oftheDPRand MPR,andmembersof thejudiciary.Theresponsesofarhasbeen lessthanencouraging.Forexample,more than2,500formshavebeendistributed to judges,butonly100havebeencom
-pletedand returnedtoKPKPN(Forum, 16/9/01).
4 This sectiondrawson variousreports andworkingpaperspreparedbySMERU (the Social Monitoring and Early Re
-sponseUnit).Mostofthesecanbedown
5 Lewis(2001:329)findsthattheDAUis sufficientinaggregateforlocalgovern
-ments’needs.
6 ArecentlycreatedprovinceinSulawesi. 7 Saad(2001)found,forexample,thatsev
-eralrattanhandicraftbusinessesinNorth Sumatra wereconsidering relocating theirbusinessestootherdistrictsiflocal
taxesbecametoocostly.
8 Dicketal.(forthcoming) arguethatone ofthegreatachievements oftheNewOr
-derwasanintegratednationaleconomy, inwhichindustrialisationwasaccompa
-niedbyrapidgrowthofdomesticintra
-andinter-islandtrade,aswellasinter
-nationaltrade.
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