indonesia - international university of japan filecountry profile 2007 indonesia this country...

Country Profile 2007

Indonesia This Country Profile is a reference work, analysing the country�s history, politics, infrastructure and economy. It is revised and updated annually. The Economist Intelligence Unit�s Country Reports analyse current trends and provide a two-year forecast.

The full publishing schedule for Country Profiles is now available on our website at www.eiu.com/schedule The Economist Intelligence Unit 26 Red Lion Square London WC1R 4HQ United Kingdom

The Economist Intelligence Unit

The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For 60 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide.

The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where the latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group.

London The Economist Intelligence Unit 26 Red Lion Square London WC1R 4HQ United Kingdom Tel: (44.20) 7576 8000 Fax: (44.20) 7576 8500 E-mail: [email protected]

New York The Economist Intelligence Unit The Economist Building 111 West 57th Street New York NY 10019, US Tel: (1.212) 554 0600 Fax: (1.212) 586 0248 E-mail: [email protected]

Hong Kong The Economist Intelligence Unit 60/F, Central Plaza 18 Harbour Road Wanchai Hong Kong Tel: (852) 2585 3888 Fax: (852) 2802 7638 E-mail: [email protected]

Website: www.eiu.com

Electronic delivery This publication can be viewed by subscribing online at www.store.eiu.com

Reports are also available in various other electronic formats, such as CD-ROM, Lotus Notes, online databases and as direct feeds to corporate intranets. For further information, please contact your nearest Economist Intelligence Unit office

Copyright © 2007 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited.

All information in this report is verified to the best of the author's and the publisher's ability. However, the Economist Intelligence Unit does not accept responsibility for any loss arising from reliance on it.

ISSN 0269-5375

Symbols for tables �n/a� means not available; �� means not applicable

Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK.

JAK

AR

TA

Sura

bay

a

Ban

du

ng

Sem

aran

g

Med

an

Pale

mb

ang

Pale

mb

ang

Jam

bi

Jam

bi

Pale

mb

ang

Pan

gka

lpin

ang

Ben

gku

lu

um

iu

mi

Ko

tab

um

i

Jam

bi

aip

enu

hai

pen

uh

Sun

gai

pen

uh

Mal

ang

Ked

iri

Cire

bo

n

Jem

ber

Lum

ajan

g

Cila

cap Su

raka

rta

Turb

anK

ud

us

Sera

ng

Suka

bu

mi

Peka

lon

gan

Peka

lon

gan

Peka

lon

gan

Yog

yaka

rta

Ban

yuw

ang

i

Mak

assa

r

Pare

par

e

Maj

ene

Wo

tuW

otu

Wo

tu

Wat

amp

on

e

Palu

Ko

laka

Go

rG

or

Go

ron

talo

Ken

dar

i

Bu

luku

mb

a

Am

bo

n

Soro

ng

Jaya

pu

ra

Man

okw

ari

Mer

auke

Am

amap

are

Fakf

ak

Bia

k

Man

ado

Tern

ate

Ban

jarm

asin

Am

un

tai

Am

un

tai

Am

un

tai

Mar

tap

ura

Pon

tian

ak

Sin

gka

wan

g

Tan

jun

gka

ran

g T

elu

kbet

un

g

Pad

ang

Ban

da

Ace

h

Pem

atan

gsi

anta

rTe

big

tin

gg

i Peka

nb

aru

Tan

jun

gp

inan

g

Bal

ikp

apan

Bal

ikp

apan

Sam

arin

da

Sam

arin

da

Bal

ikp

apan

Sam

arin

da

San

gku

lira

ng

Tara

kan

Tan

jun

gre

deb

MMat

aram

Den

pas

arD

enp

asar

Den

pas

arR

aba

Ku

pan

g

Mad

iun

I

N

D

O

N

E

S

I

A

THA

ILA

ND

LAO

SM

YAN

MA

R

VIE

TNA

MP

HIL

IPP

INE

SC

AM

BO

DIA

MA

LAYS

IA

MA

LAYS

IA

BR

UN

EI

AU

STR

ALI

A

TIM

OR

-LE

STE

SIN

GA

PO

RE

IND

IAN

OCE

AN

Java

Sea

Ara

fura

Sea

Ban

da S

ea

Mol

ucc

aSe

a

Sera

m S

ea

Tim

or S

ea

Savu

Sea

Flor

es S

ea

Cele

bes

Sea

Sulu

Sea

Bal

i

Sum

baw

a

Sim

eulu

e

Nia

s Sibe

rut Sipu

ra

Paga

i Uta

raPa

gai S

elat

an

Ban

gka

Bel

itu

ng

Nat

un

a B

esar

Sum

ba

Flor

esA

lor

Wet

ar

Obi

Tim

or

Lom

bok

Bu

ton

Mad

ura

Sula

wes

i

Bu

ru

Tali

abu

Kep

ula

uan

Tala

ud

San

gir

Pele

ng

Sera

m

Pala

uH

alm

aher

a

Pala

u M

orot

ai

Kep

ula

uan

Aru

Bia

k

Kep

ula

uan

Tan

imba

r

Bo

rneo

Java

Java

Java

Sum

atr

a

Ace

h

Pa

pu

a(I

ria

n J

aya

)

Sou

th C

hin

aSe

a

An

dam

anSe

a

PACI

FIC

OCE

AN

Stra

itof

Mal

acca

Ka

lim

an

tan

PA

PU

A

NE

W G

UIN

EA

0 k

m2

50

50

075

01,

00

0

0 m

iles

25

05

00

© T

he

Eco

no

mis

t In

tell

igen

ce U

nit

Lim

ited

20

07

Jun

e 2

00

7

Mai

n r

ailw

ay

Mai

n r

oad

Inte

rnat

ion

al b

ou

nd

ary

Mai

n a

irp

ort

Cap

ital

Maj

or

tow

n

Oth

er t

ow

n

Country Profile 2007 www.eiu.com © The Economist Intelligence Unit Limited 2007

Comparative economic indicators, 2006

Gross domestic product(US$ bn)

Sources: Economist Intelligence Unit estimates; national sources.

Gross domestic product(% change, year on year)


Consumer prices(% change, year on year)


Gross domestic product per head(US$ '000)


0.0 5.0 10.0 15.0 20.0 25.0 30.0

Vietnam

Philippines

Indonesia

Thailand

Malaysia

Taiwan

South Korea

Hong Kong

Singapore

0 200 400 600 800 1,000

Vietnam

Philippines

Singapore

Malaysia

Hong Kong

Thailand

Taiwan

Indonesia

South Korea

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0

Taiwan

Singapore

Hong Kong

South Korea

Malaysia

Thailand

Philippines

Vietnam

Indonesia

0.0 2.0 4.0 6.0 8.0 10.0

Taiwan

South Korea

Thailand

Philippines

Indonesia

Malaysia

Hong Kong

Singapore

Vietnam

Indonesia 1

© The Economist Intelligence Unit Limited 2007 www.eiu.com Country Profile 2007

Contents

Indonesia

3 Basic data

4 Politics 4 Political background 6 Recent political developments 7 Constitution, institutions and administration 9 Political forces 12 International relations and defence

17 Resources and infrastructure 17 Population 18 Education 19 Health 20 Natural resources and the environment 21 Transport, communications and the Internet 24 Energy provision

27 The economy 27 Economic structure 28 Economic policy 32 Economic performance 35 Regional trends

36 Economic sectors 36 Agriculture 39 Mining and semi-processing 40 Manufacturing 42 Construction 42 Financial services 44 Other services

45 The external sector 45 Trade in goods 47 Invisibles and the current account 48 Capital flows and foreign debt 50 Foreign reserves and the exchange rate

51 Regional overview 51 Membership of organisations

54 Appendices 54 Sources of information 55 Reference tables 55 Population 55 Geographical distribution of population by province, 2000 56 Labour force 56 Transport statistics

2 Indonesia


57 National energy statistics 57 Central government budget summary 57 Money supply 57 Interest rates 58 Gross domestic product 58 Nominal gross domestic product by expenditure 59 Real gross domestic product by expenditure 59 Prices and earnings 60 Agricultural production 60 Minerals production 61 Manufacturing production 61 Main composition of trade 61 Main trading partners 62 Balance of payments, IMF series 63 External debt, World Bank series 63 Foreign reserves 63 Exchange rates

Indonesia 3


Indonesia

Basic data

1,904,443 sq km

3,166,163 sq km (before deductions for sea area now under the control of Timor-Leste)

5,070,606 sq km

232m (2006 estimate)

Population in �000 (2000 census)

Jakarta (capital) 8,385 Medan 1,792 Surabaya 2,589 Semarang 1,345 Bandung 2,142 Palembang 1,442

Tropical

Weather in Jakarta (altitude 8 metres)

Hottest months, April-May, 24-31°C (average daily minimum and maximum); coldest months, January-February, 23-29°C; wettest months, January-February, 300 mm average rainfall

Indonesian (Bahasa Indonesia), as well as some 250 other regional languages and dialects. English has replaced Dutch as the main second language, and is widely spoken in government and business circles.

Metric system

Rupiah (Rp). Average exchange rate in 2006: Rp9,159:US$1. Exchange rate on June 19th 2007: Rp8935:US$1

Western Zone seven hours ahead of GMT, Central Zone eight hours ahead, Eastern Zone nine hours ahead

January 1st-December 31st (beginning in 2001)

New Year, January 1st; Independence Day, August 17th; Christmas, December 25th. Other moveable holidays: Nyepi, Easter, Miraj, Ascension Day, Waisak, Eid al-Fitr, Eid al-Adha, Islamic New Year, Maulud

Land area

Sea area (exclusive economic zone)

Total area

Population

Main towns

Climate

Languages

Measures

Currency

Time

Fiscal year

Public holidays

4 Indonesia


Politics

Indonesia is a multi-party presidential democracy. In 2004 the president and the vice-president were elected by direct popular vote for the first time, and the automatic right of the security forces to have direct representation in the legislature came to an end. There are two large secular-nationalist parties, Golkar and the Indonesian Democratic Party-Struggle (PDI-P), and a smaller party, the Democrat Party (PD), which together account for nearly 50% of seats in the legislature. Parties with an Islamic orientation account for about 25% of seats. The president, Susilo Bambang Yudhoyono, currently presides over a loose, and sometimes fractious, coalition of parties, which includes Golkar. The PDI-P is the largest party in opposition.

Political background

The territorial extent of the Republic of Indonesia is defined principally by the boundaries of the former Dutch colonial empire in South-east Asia. The territories now making up the country had never constituted a single political entity before the establishment of Dutch colonial rule, and their pre-colonial history was marked by the rise and fall of a number of important empires and kingdoms. Close commercial links with the Arabian Peninsula from the 13th century led to the gradual Islamisation of the archipelago, replacing much of the prevailing Hindu and Buddhist culture, although Hinduism remains strong in Bali.

In 1511 the Portuguese arrived in Indonesia, in the quest for spices, followed by the Spanish, resulting in the introduction of Christianity to the region. Dutch spice traders first arrived in Indonesia in 1596, beginning a process that led ultimately to the establishment of colonial rule in Indonesia from the mid-1800s. Expansion of the Dutch East Indies continued into the early years of the 20th century in an extended period of territorial conquest. In the early 1900s a pan-Indonesian nationalism began to emerge. The Japanese conquest of the Dutch East Indies in 1942 and Japan!s subsequent defeat enabled the nationalists to proclaim Indonesia!s independence on August 17th 1945. This was followed by an armed struggle against returning Dutch forces. It was not until late 1949 that the Dutch formally transferred sovereignty over the archi-pelago, excluding Dutch New Guinea (Papua), to Indonesia. The Portuguese remained in control of East Timor. The leader of the Indonesian Nationalist Party (PNI), Soekarno, became president.

In 1950 a unitary political structure was established, and in 1955 the first general election was held. Soekarno won, but the Indonesian Communist Party (PKI) gained a substantial 16% of the vote. Soekarno!s nationalism subsequently led to the Indonesian invasion of Papua in 1962 and to a conflict with Malaysia over parts of northern Borneo. The period was characterised by revolutionary zeal, but also by political instability, a lack of economic prudence and eventually economic decline. In 1965 an abortive coup, led by a group of middle-ranking army officers but blamed on the PKI, heralded the end of the Old Order, as the Soekarno era came to be known. The coup was crushed by the army and as many as 750,000 alleged members of the PKI were killed. In

Indonesia 5


March 1966 the New Order was established, when the executive power of government was transferred to General Soeharto.

Soeharto became acting president in March 1967 and was subsequently elected president for six further five-year terms in elections that were neither free nor fair. Supported by the military, Soeharto imposed a repressive regime; there was no freedom of the press or of expression. A small number of Soeharto!s family and friends amassed vast wealth, primarily through the exploitation of Indonesia!s abundant natural resources. The period was nevertheless characterised by rapid economic expansion, particularly after 1970, and this probably helped to legitimise the regime in the eyes of the people. However, opposition to the regime started to become more vocal in the mid-1990s"the parliamentary election campaign in May 1997 was exceptionally violent"and was given added momentum by the severe economic crisis that gripped Indonesia in late 1997. From early 1998 protests by the reformasi (reform) movement added to the pressure on Soeharto!s government, and after four days of rioting in the capital, Jakarta, in May of that year even the president!s most loyal supporters became convinced that a change was needed. Having lost the backing of the military high command and most of his cabinet, Soeharto resigned on May 21st 1998.

His downfall ushered in a period of political instability, as Indonesia embarked on a rapid transition to democracy. Soeharto was succeeded by his vice-president, Bacharuddin Jusuf Habibie, who lasted 18 months in office before the People!s Consultative Assembly (MPR) voted in October 1999 to reject his account of his time in office, which precipitated his resignation. Although he did not wield power for long, Mr Habibie introduced important legislation providing for Indonesia!s first democratic election in 34 years, which duly took place on June 7th 1999. No single party won an outright majority, but the secular-nationalist Indonesian Democratic Party-Struggle (PDI-P), led by Soekarno!s daughter, Megawati Soekarnoputri, emerged as the leading party. This proved insufficient to secure the presidency, however, and the MPR instead appointed Abdurrahman Wahid, a moderate Muslim cleric and leader of the National Awakening Party, with Ms Megawati appointed to the vice-presidency. The administration quickly ran into problems under the leadership of the ailing and erratic Mr Wahid. A feud with parliament led to his impeachment in July 2001 after only 21 months as president, and his subsequent removal from office.

Ms Megawati was then appointed to the presidency, while Hamzah Haz, the leader of the United Development Party (PPP), an Islamic party, became vice-president. Ms Megawati led an uninspiring and conservative administration, which benefited from a consensus among all political parties on the need to restore stability. Despite her huge popular following, Ms Megawati proved to be an aloof and ineffectual president. During her tenure, political and economic stability was restored, but she alienated the electorate by failing to act against Indonesia!s endemic corruption. As her presidency advanced, she also leaned increasingly on a resurgent military for support in the face of her uneasy relationship with the Islamist parties in her coalition government.

The New Order

6 Indonesia


Recent political developments

In April 2004 the second parliamentary election since the downfall of Soeharto, and the first under a new constitutional framework, took place. In an orderly and relatively transparent poll the electorate voted for members of the 550-seat House of People!s Representatives (DPR) and for 128 members of the new Regional Representative!s Assembly (DPD). Golkar, the political vehicle of Soeharto, won the largest number of seats in the election, with 21.8% of the vote; the PDI-P saw a sharp drop in its support, garnering only 18.7% of the vote, while the mainstream Islamist parties failed to increase their share of the vote. The election was noteworthy for the rise in support (primarily in urban areas) for two smaller parties, the secular-nationalist Democratic Party (PD) and the Islamist Prosperous Justice Party (PKS). Both parties campaigned primarily on an anti-corruption platform.

The April general election was followed in July 2004 by the country!s first ever direct presidential election. With no outright winner emerging, the two leading candidates"the incumbent, Ms Megawati, and a retired army officer, Susilo Bambang Yudhoyono from the PD"went forward to a run-off in September 2004. Mr Yudhoyono won a landslide victory, gaining 61% of the vote, as a result of a campaign focusing on job creation, economic growth and fighting corruption, and he was inaugurated on October 20th. Since then he has performed well in office, appointing a cross-party cabinet, consolidating steadily from his initially weak parliamentary standing, and installing allies in influential posts. A major breakthrough was achieved in December 2004 with the election of his vice-president, Jusuf Kalla, to the chairmanship of Golkar. Thereafter Golkar, which had been in opposition to the president, reversed this position and began offering its support to Mr Yudhoyono.

Important recent events

April 2004

The second parliamentary election since the downfall of the former president, Soeharto, sees Golkar emerge as the largest party in the House of Representatives (DPR). The election is also notable for the emergence of two new parties, the nationalist-secular Democratic Party (PD) and the Islamist Prosperous Justice Party (PKS).

October 2004

Susilo Bambang Yudhoyono is sworn into the presidential office, becoming the nation!s first democratically elected president, after victory in a run-off vote against the incumbent president, Megawati Soekarnoputri.

December 2004

An earthquake measuring 9 on the Richter scale triggers a series of tsunami (tidal waves), devastating coastal areas of Aceh and killing over 130,000 people in the province. Towns and cities are razed, the fishing industry is destroyed, and agricultural land is caked in salty sludge. Reconstruction costs are estimated at US$4bn-5bn.

New parties emerge in the 2004 elections

The first democratically elected president takes office

Indonesia 7


June 2005

Staggered local elections begin in Indonesia!s 33 provinces, 354 districts and 91 cities. Direct elections for the offices of provincial governor, bupati (district head), and mayor are seen as a means to increase the accountability of local executive offices, and the final step in cementing democracy in Indonesia.

August 2005

The government and the Free Aceh Movement (GAM) sign a peace agreement in Helsinki, Finland, after the horror of the tsunami served to reinvigorate attempts to bring an end to the separatist conflict in the province.

December 2005

A cabinet reshuffle, focused primarily on strengthening economic policymaking, is announced. The choice of new ministers demonstrates the president!s strengthening hand vis-à-vis his coalition partners.

February 2006

The DPR begins to debate a controversial draft anti-pornography law that proposes draconian curbs on individual freedoms. Critics allege that the bill is an attempt to introduce sharia (Islamic) law by stealth. Seen in a wider context, the clash is part of a wider debate on the role of religion in the state, pitting those who cherish Indonesia�s secular traditions against a vocal minority of hardline Islamists.

October 2006

Indonesia is elected to the UN Security Council, securing the non-permanent seat reserved for Asian countries for 2007-08. The appointment confirms Indonesia�s growing presence on the international stage during Mr Yudhoyono�s presidency.

December 2006

The peace process in Aceh moves onto firmer ground after free and fair elections are held to appoint a provincial governor and 21 district heads. The provincial election is won by a former member of GAM, Irwandi Yusuf.

May 2007

Mr Yudhoyono carries out a second reshuffle of his cabinet, with a strong focus on distancing his government from a string of corruption scandals and transport disasters.

Constitution, institutions and administration

Indonesia is governed by a constitution drawn up in 1945 and based on five principles: monotheism, humanitarianism, national unity, representative democracy by consensus, and social justice. These principles are embodied in the state ideology, Pancasila (a Sanskrit term originally referring to a Buddhist code of ethics). The constitution has undergone four revisions since 1999 and now provides for six principal organs of state: the People!s Consultative Assembly (MPR), the presidency, the House of People!s Representatives (DPR) and the Regional Representative!s Council (DPD), the Supreme Court, and the State Audit Board (BPK). These constitutional revisions and other reforms have brought about substantial changes to governance and the balance of institutional power in Indonesia.

8 Indonesia


Indonesia follows a presidential system of government, in which the president leads the executive arm of government. The presidency remains Indonesia�s dominant political office, although post-1999 constitutional reforms have greatly increased the checks and balances on the use of executive power. The president�s term in office is now limited to two five-year terms and all legislation issued by the executive arm of government must now be approved by the DPR. Since 2004 the president and vice-president have been directly elected by popular vote.

The MPR is the highest organ of state and is formed through a joint sitting of the DPR and the DPD. It is now responsible for supporting and amending the constitution and inaugurating the president, and has powers to dismiss the president. Under normal circumstances it is convened at least once every five years. Elections to the DPR and the DPD are held every five years, with seats contested under a complicated system of indirect proportional representation that gives a disproportionately large number of seats to Indonesia!s outer islands.

The DPR, which has 550 members, is Indonesia�s main legislative chamber. Its powers have been substantially enhanced by the post-1999 constitutional reforms, and it now forms a strong counterweight to the presidency. It debates, revises and adopts legislation proposed by the government and has the right to initiate legislation of its own accord. However, its reputation and standing have been laid low by its slow pace of working, the frequent adoption of poorly drafted and inconsistent legislation, and the perceived corruption of its members. As the electorate votes for political parties rather than candidates, members are chosen by the parties in proportion to their share of the vote and are not accountable to a local constituency. As a result, members tend to represent the interests of their respective political parties rather than those of the electorate.

The DPD consists of 128 directly elected representatives from Indonesia!s 33 provinces. Its formal powers are limited. It cannot pass or veto legislation, but can only propose bills to the DPR, discuss the bills and then monitor their implementation if they are passed. Furthermore, these roles are limited to legislation on specific topics related to the regions. The DPD is currently lobbying to have its powers extended.

Further major changes to the way Indonesia is governed have resulted from a rapid and sweeping programme of regional autonomy that began in 2001. Under this programme, decision-making and spending authority over all areas of government except foreign policy, defence, justice, fiscal affairs and religion was devolved to local districts (kabupaten) and cities. Democratic reforms implemented at a national level have been replicated at a local level, and district and provincial legislatures are now appointed through direct elections. In 2005 a programme of staggered elections for local executive offices was initiated in all of Indonesia�s 33 provinces, 354 districts and 91 cities. This decentralised and democratic system of government contrasts greatly with the situation during Soeharto�s rule, during which Indonesia was a highly

Parliament is strengthened

Indonesia 9


centralised state and the country�s legislative chambers were subservient to the presidency.

Political forces

Political parties were subject to severe restrictions under Soeharto!s New Order government. The main New Order political grouping was Golkar, a coalition of professional and functional groups, civil servants and retired military officers set up in the early 1960s to counter the growing appeal of the Indonesian Communist Party (PKI). As a self-proclaimed "political group" rather than a party, Golkar was not bound by the campaigning restrictions that applied to political parties, allowing it to develop a formidable electoral infrastructure, particularly in rural areas. From 1973 only two state-sanctioned opposition parties were permitted, the Indonesian Democratic Party (PDI), a coalition of Christian and nationalist parties, and the United Development Party (PPP), a coalition of Muslim parties. These parties stood little chance against the privileged Golkar and typically mustered only 30% of the vote in parliamentary elections, leaving Golkar with an unassailable majority.

Golkar is now registered as a political party and maintains a secular-nationalist outlook. Despite being tainted by its association with Soeharto!s autocratic regime, the party!s robust electoral infrastructure helped it to first place in the 2004 general election. However, the party!s win was less than convincing, and it suffered embarrassment in the presidential election when its candidate, Wiranto, failed to make it through to the second round. The vice-president, Jusuf Kalla, exploited discontent at this humiliation to replace Akbar Tandjung as party leader in December 2004. Following Mr Kalla!s victory, Golkar left an opposition coalition that it had formed with the Indonesian Democratic Party-Struggle (PDI-P) and offered its support to the government of the president, Mr Yudhoyono.

The secular-nationalist PDI-P, led by Megawati Soekarnoputri, remains the second-largest party in the DPR. However, it lost its reformist image after failing to take measures against corruption during Ms Megawati!s presidency. The party is deeply divided following its poor electoral performance in 2004, and is isolated in opposition to the current president. Its isolation is in part attributable to the personal grudge borne by Ms Megawati against Mr Yudhoyono, who left her cabinet to run against her for the presidency.

The Democratic Party (PD) is a new secular-nationalist party that was co-founded by Mr Yudhoyono and launched officially in 2003. It has been vocal in its calls for reform and measures to tackle corruption. It did well in the 2004 election, winning 7.5% of the national vote, but has since failed to make a noticeable impact on the national political scene, in part because of internal divisions.

Politicised Islam was strongly discouraged by Soeharto, but his successor, Mr Habibie, handed important cabinet portfolios to a number of modernist, nationalist Muslims from the Association of Islamic Intellectuals. His successor as president, Mr Wahid, was a leader of Nahdlatul Ulama, an Islamic

Secular-nationalist parties remain dominant

Political Islam has largely failed to gain ground

10 Indonesia


organisation with 37m members that draws much of its support from traditionalist Muslims in rural areas in East and Central Java, but his political views were explicitly secular.

The Islamic political parties failed to make gains in the 2004 election. The established Islamic parties, particularly the United Development Party (PPP) and the National Mandate Party (PAN), performed poorly, losing votes to the secular parties and to new and more vigorous Islamic parties, such as the fundamentalist Prosperous Justice Party (PKS), which campaigned on the strength of its corruption-free image and reformist policy stance. Although voting in the 2004 election suggested that the electorate wishes to maintain a divide between politics and religion, in recent years a vocal and aggressive minority of Islamic extremists has come to exercise increasing influence over the national political agenda, with secular and moderate Islamic politicians, and the security forces, apparently afraid to challenge them.

The Indonesian military (TNI) has faced intense pressure to end its political role since the fall of Soeharto. Constitutional reforms adopted in 2002 withdrew the military�s 38 unelected seats in the DPR from 2004. Although the military no longer has parliamentary representation, it retains a powerful influence over the government, and former members of the military hold four important posts in the current cabinet (not including the president, who is also a retired army general). Calls for tighter security in the wake of terrorist attacks have also increased the military!s political leverage.

Main political figures

Susilo Bambang Yudhoyono

Mr Yudhoyono was born in East Java in 1949. He rose to the rank of lieutenant-general and was the army chief of territorial affairs before being appointed to the cabinet in October 1999 as minister of mines and energy. His political star rose with his appointment to the influential post of co-ordinating minister for political, social and security affairs in August 2000. The then president, Abdurrahman Wahid, sacked him in July 2001, but he was restored to his former post when Megawati Soekarnoputri became president later in the same month. While in the post, Mr Yudhoyono won international acclaim for his strong stance against terrorism, and domestically he gained a reputation for honesty. He completed a degree in agricultural economics in 2004. Mr Yudhoyono was elected president with a huge popular mandate in the second round of the presidential election in September 2004. He remains broadly popular with the electorate, but is coming under increasing criticism for his apparent indecisiveness and reluctance to enact unpopular reforms.

Jusuf Kalla

Mr Kalla has a degree in economics and was active in both business and government during Soeharto!s rule. He was particularly involved in the work of the South Sulawesi Chamber of Commerce and Industry (KADIN), and served in the House of People!s Representatives (DPR) for four consecutive periods before becoming a member of the cabinet under Mr Wahid!s presidency in October 1999. He was not close to Mr Wahid and was sacked from his position as trade and industry minister by the president in April 2000. Mr Kalla held the position of

The military's official political role has ended

Indonesia 11


co-ordinating minister for people!s welfare in the Megawati administration. He has considerable investments in the agribusiness, retail and construction sectors, and there have been allegations in the past that he has abused his position to benefit his companies. He also has a reputation for hardline Muslim views. His election to the chairmanship of Golkar in December 2004 and his high-profile performance in the vice-presidency puts him in a strong position to run for the presidency in 2009.

Megawati Soekarnoputri

Daughter of Soekarno, the first president of Indonesia, Ms Megawati has been active in politics since 1987 and assumed the leadership of the Indonesian Democratic Party (PDI) in December 1993. She founded the Indonesian Democratic Party-Struggle (PDI-P) in 1996 and led it to victory in the 1999 parliamentary election, before being outmanoeuvred in the presidential election in October of that year. However, in July 2001 she assumed the presidency following the impeachment of Mr Wahid. In office Ms Megawati proved an enigmatic and ultimately ineffectual president, but she managed to oversee the return of relative political and economic stability. She lost to Mr Yudhoyono in the 2004 presidential election largely because she had failed to act against Indonesia!s endemic corruption. In her last month in office she damaged her reputation by failing to acknowledge defeat and by rushing through controversial legislation. Despite her diminished reputation, she was re-elected as chair of the PDI-P in an election held in April 2005.

Agung Laksono

Mr Laksono was a protégé of a former Golkar chairman, Akbar Tandjung, who helped him to secure the position of speaker of the House of People!s Representatives (DPR) in October 2004. The subsequent ousting of his mentor has left Mr Laksono weakened within the Golkar structure, but his influential post means that he still plays a pivotal role in the smooth functioning of the legislative process. Mr Laksono is a former minister of youth affairs under Soeharto. He is known as an opportunist and long-time bureaucrat with links to the military, business and the old political elite.

Hidayat Nur Wahid

Mr Nur Wahid was born in Klaten, Central Java, in 1960. He is an Islamic theologian, who studied at the National Islamic Institute in Yogyakarta in 1979 before going on to pursue further religious studies in Saudi Arabia. He was chairman of the up-and-coming Prosperous Justice Party (PKS) until he resigned his party post to become speaker of the People!s Consultative Assembly (MPR) in 2004. Under Mr Nur Wahid!s leadership the PKS fought a well-organised campaign in the 2004 election on an anti-corruption platform, winning a 7.3% share of the vote. Mr Nur Wahid was then quick to align the PKS behind Mr Yudhoyono, so winning influence in the new government. He and the PKS support the introduction of sharia (Islamic) law through gradual change, rather than radical means.

The country!s provincial and district-level governments have grown as a political force since the introduction of regional autonomy on January 1st 2001. At times this has placed Indonesia!s regions at odds with the central government, which is fighting to retain its authority. Regional autonomy was introduced to ease resentment of the central government!s control of natural-resource revenue and its insensitivity to regional differences. However, the

Regional autonomy changes the balance of power

12 Indonesia


legislation was rushed through and contradicted many existing laws, creating considerable legal and administrative uncertainty. These problems are slowly being addressed, and a new balance of power is emerging, in which district and provincial governments are a real political force.

International relations and defence

Indonesia!s first president, Soekarno, sought recognition as a revolutionary leader of the developing world. The Asia-Africa Conference, held in Bandung in West Java in 1955, provided a basis for the later establishment of the Non-Aligned Movement, a group of countries that sought to remain outside the struggles of the cold war. Soekarno also ordered the military infiltration of Dutch New Guinea (now Papua) in 1962 and followed a policy of konfrontasi (confrontation) with Malaysia after it secured independence in 1963.

Foreign policy was transformed under Soeharto, with a pragmatic and low-key approach allowing Indonesia to concentrate on domestic economic development. Despite theoretically adhering to the principle of non-alignment, Indonesia drew increasingly close to the West, and since then it has generally enjoyed good relations with most Western countries.

Until the mid-1980s foreign policy was focused mainly on the Association of South-East Asian Nations (ASEAN). From the mid-1980s the government began to seek a more prominent international role, chairing the Non-Aligned Movement from 1992 to 1995 and playing a leading part in developing the Asia-Pacific Economic Co-operation (APEC) forum. Financial constraints and domestic instability forced a period of greater introspection from 1998, but in recent years the government has again played a more active role on the international stage. It has taken a prominent role in major policy shifts within ASEAN, took part in the East Asia Summits in 2005 and 2006, and was appointed to sit on the UN Security Council from 2007-08. This rising profile reflects Indonesia�s unique status as both the world�s largest Muslim country and a secular democracy, and its potential to mediate between the West and Islamic countries that this proffers.

Indonesia has tempestuous relations with its immediate neighbours, Australia, Singapore and Malaysia. Relations with Australia deteriorated badly as the result of Australia!s leadership of the international military intervention in East Timor in 1999. Although relations have since recovered from this nadir, issues including the transit through Indonesia of refugees seeking entry into Australia, illegal fishing in Australian territorial waters, Australia!s staunch support for US foreign policy and perceived Australian support for Papuan independence have caused periodic disputes. However, relations should improve following the signing of a new bilateral security treaty in November 2006, supporting closer co-operation on defence, law enforcement, counter-terrorism, maritime security and disaster emergency response. Relations with Singapore have been strained by disputes over investment, the export of natural resources and delays in the eventual signing of an extradition treaty, which Indonesia wanted in order to pursue corruption suspects who have fled to the island state. Despite cultural

The New Order brought greater pragmatism

Relations with neighbours are turbulent

Indonesia 13


similarities and close ties through ASEAN, relations with Malaysia have also been strained in recent years by disputes over migrant workers, contested islands and territorial waters that hold oil and gas reserves.

Indonesia nevertheless manages to co-operate effectively with its neighbouring countries and influence regional processes within South-east and East Asia. At the annual ASEAN summit meeting in December 2005 Indonesia was among the countries that expressed open criticism of Myanmar!s human rights record and called for the release of Aung San Suu Kyi, a jailed opposition leader. This prompted a reprimand from ASEAN, the first in the 38-year history of the organisation, which normally follows a strict rule of non-interference in member states! domestic affairs. At the inaugural East Asia Summit, also in December 2005, the ten ASEAN nations were joined by China, Japan, South Korea, India, Australia and New Zealand in what was intended as the first step towards a wider East Asian Community. The outcome was successful for Indonesia. The ASEAN Secretariat, which is based in Jakarta, was given a mandate to formulate co-operative programmes for the grouping, giving South-east Asia and Indonesia a central political role in steering the project. Prior to the summit South-east Asian nations also succeeded in widening membership of the forum to include India and Australia and New Zealand, preventing domination by China.

Timor-Leste (formerly East Timor) has cast a shadow over Indonesian foreign policy since the intervention of Indonesian troops in the former Portuguese colony in 1976. Timor-Leste separated from Indonesia in 1999 and became formally independent in 2002. Since then the two governments have followed an active policy of reconciliation, working through a joint Commission of Truth and Friendship (CTF). However, the failure of the Indonesian government to prosecute those responsible for violence following a 1999 referendum on independence in Timor-Leste means that closure has yet to be brought to this issue. A review conducted by a UN expert panel in 2005 described the Timor-Leste human rights tribunal as deficient, and recommended establishing an international tribunal to prosecute those responsible for the 1999 rampage. A separate report by the UN-sanctioned Commission for Reception, Truth and Reconciliation (CAVR) in Timor-Leste, also released in 2005, concluded that up to 183,000 people"approximately one-third of the territory!s population"were killed, "disappeared", starved or died of illnesses linked to the conflict during the 24 years of Indonesian occupation.

However, international pressure over human rights abuses in Timor-Leste and elsewhere has diminished in recent years, with Indonesia!s strategic role in the "war on terrorism" taking precedence over other matters. The form of Islam practised in Indonesia has traditionally been moderate, but a more radical fundamentalist movement has emerged in recent years. Initially, fundamentalist groups focused their attacks on the sizeable Christian communities in parts of Indonesia, but more recently groups with links to international Islamist terrorism, notably the al-Qaeda network, have emerged. The bombings in Bali in October 2002 and October 2005, the JW Marriott hotel in Jakarta in 2003 and the Australian embassy in 2004 have all been attributed to Jemaah

Timor-Leste

14 Indonesia


Islamiah (JI), a terrorist organisation linked to international extremists that aims to create a pan-regional South-east Asian Islamic state.

The perceived opening of a new front in the war against terrorism in Indonesia has prompted the US, Australia and other Western nations to restore defence and security ties with Indonesia after all such co-operation was suspended in reaction to the invasion of Timor-Leste by Indonesia in 1999. (Military ties between the Indonesia and the US had been reduced after the 1991 Santa Cruz massacre in Timor-Leste.) The US announced the restoration of full military ties in late 2005.

Moves to restore military relations with the US were welcomed by the Indonesian military (TNI), which has faced serious difficulties in maintaining and upgrading equipment as a result of US sanctions. Restrictions on the sale of US military hardware to Indonesia also forced the TNI to look elsewhere to replace its worn-out equipment. In November 2006 Indonesia signed a US$1bn deal with Russia to purchase six Sukhoi jet fighters (adding to four purchased in 2003), submarines, helicopters and other military hardware. The government has also been seeking support from China to revive a short- and medium-range missile programme and has stated that it is not going to let these initiatives elapse because of the restoration of ties with the US.

The end of the cold war (which led to a reduction of the US presence in South-east Asia) and the militarisation of China and India prompted a drive to improve Indonesia!s defence capacity. The 1997-98 economic crisis resulted in cuts to the military budget, with spending falling from nearly 5% of development spending in 1997-98 to only 1.9% of development spending in 2002. Concerns over separatism in the nationalist-leaning government of Megawati Soekarnoputri (2001-04) gave the military more leverage over the state budget, with defence spending rising by 15.5% to Rp22trn (US$2.5bn) in 2004.

Armed forces, 2006 Indonesia Australia South Korea ThailandArmy 233,000 25,259 560,000 190,000 Strategic reserve 30,000 � � � Regional commands 150,000 � � � Special forces 5,300 � � �Navy 45,000 12,681 63,000 70,600 Marines 15,000 11,691 28,000 23,000 Naval air 1,000 990 � 1,940Air force 24,000 13,670 64,000 46,000Paramilitary Police 280,000 � 4,500 113,700 Marine police � � 4,500 2,200 People�s securitya 40,000 � 3,500,000 45,000Total armed forces 702,000 70,583 5,187,000 506,600Active 302,000 51,610 687,000 306,600Reserves 400,000 18,973 4,500,000 200,000

a Part-time auxiliary force receiving three weeks� basic training each year in Indonesia, civilian defence corps in Thailand and South Korea.

Source: International Institute for Strategic Studies, The Military Balance, 2007.

Military relations with the US improve

Off-budget finance supports the military

Indonesia 15


Spending on defence has continued to rise during the Yudhoyono presidency, reaching Rp27trn (0.9% of GDP) in 2006 and Rp31.3trn (0.9% of GDP) in 2007. These increases have been driven by a realisation that a larger official budget is needed to end the military�s reliance on unofficial sources of finance. The state budget accounts for an estimated 30% of military expenditure, with the remaining 70% funded by the military itself through off-budget sources, including a sizeable legitimate business empire and numerous illegal activities, such as protection racketeering, gambling, prostitution, and illegal logging and fishing. A bill passed in September 2004 requires the TNI to cease its involvement in business activity within five years, with military assets either to be sold off by the government or incorporated into the state sector. Removing the military from business, and funding it wholly through the state budget, is a crucial step towards holding the TNI accountable to the civilian institutions of government. However, there are worrying signs of back-sliding in this vital set of reforms, with strong indications that the military will be allowed to retain its co-operatives and foundations. These latter entities make up the bulk of military assets, owing to less stringent tax and accounting requirements.

Security risk in Indonesia

Indonesia!s vast size and diversity mean that the country is subject to internal tensions that need to be constantly and carefully managed. A release from tyranny and coercion at the end of the Soeharto era, as well as the manipulation of discontent for political ends, served to exacerbate these innate tensions, leading to a surge in separatist violence, clashes between the military and civilian protestors, and ethnic and religious violence in many parts of the country during Indonesia!s transition to democracy. A degree of equilibrium was restored under the presidency of Megawati Soekarnoputri, although her support for the military exacerbated separatist conflicts and human rights abuses in the provinces of Aceh and Papua. The government of Susilo Bambang Yudhoyono has shown itself to be highly competent on peace and security issues, overseeing the negotiation and implementation of a peace process that has brought an end to a 29-year conflict in Aceh. However, a careful hand will be needed to manage tensions in the separatist-minded province of Papua.

Armed conflict

Communal violence claimed thousands of lives in the unstable years that followed the end of the Soeharto era. The violence was confined to areas with delicate religious and ethnic balances, such as the Moluccas, Central Sulawesi and Central Kalimantan. Peace accords signed in all of these areas in 2000-02 have succeeded in restoring relative calm, although the Poso region of Central Sulawesi remains volatile and highly tense. Solving the conflict in Aceh proved more of a challenge. The collapse of the December 2002 peace accord led to the imposition of martial law in the province in May 2003. A military assault was simultaneously launched on the Free Aceh Movement (GAM) guerrillas. Martial law was replaced by "civil emergency status" in May 2004, but this had little impact on security policy in the province. However, the tsunami disaster at the end of 2004 cast a new perspective over the conflict, and the government and GAM began negotiations under foreign mediation. A peace

16 Indonesia


agreement signed in Helsinki, Finland, in August 2005, has led to disarmament and a scaling back of the military presence in the province. Legislation translating the peace accord into Indonesian law has passed through the House of Representatives (DPR). GAM has disbanded, renounced its goal of independence in exchange for concessions on autonomy, and its former members participated in democratic local politics in the province. In the extreme east of the country, a broad cross-section of native Papuans support independence by peaceful means, but the Free Papua Organisation (OPM), which is fighting for independence, is poorly armed and badly organised. Discontent with Indonesian rule has been inflamed by alleged human rights abuses by the military, and by the plunder of the province!s natural resources. The partition of Papua into two provinces"Papua and West Papua (formerly West Irian Jaya)"has also caused resentment. A perceived disregard for the terms of special autonomy granted to the province in 2001, and continued anger at the exploitation of Papua!s natural wealth, led to heightened tensions in early 2006, with several members of the security forces killed in clashes with demonstrators.

Terrorism

Hardline Islamist terrorist groups resurfaced in Indonesia after the fall of Soeharto. These groups initially targeted Indonesia!s Christian communities, but in recent years they have turned their attention to Western targets. Jemaah Islamiah (JI), a terrorist organisation seeking to establish a South-east Asian Islamic state, was responsible for the October 2002 and 2005 Bali bombings, as well as for attacks on the JW Marriott hotel in the capital, Jakarta, in 2003, and on the Australian embassy in 2004. After a slow start the Indonesian government has conducted an effective campaign against JI, arresting close to 300 operatives since the 2002 Bali attack, including most of the organisation!s top leadership. Close co-operation with other South-east Asian security forces and the US and Australian counter-terrorist services, together with tough new anti-terrorism legislation and better intelligence, has also served to impair JI!s operational capacity. The organisation nevertheless remains present in Indonesia, and the release of many militants and sympathisers jailed in the immediate aftermath of the 2002 Bali bombings, as well as continued evidence that the group is actively plotting further attacks, has led to fears of a resurgence in its activities.

Civil unrest

Mass demonstrations became a feature of the early years of Indonesian democracy, but have waned with the return of political stability. The student movement"which drove the reformasi, or reform, movement of the late 1990s"has lost its ideological focus. The government!s success in raising fuel prices in March and October 2005 demonstrates just how far mass protests have slipped from the political landscape in recent years. Rioting sparked by fuel price increases led to the fall of Soeharto in 1998, and the government of Megawati Soekarnoputri backed away from an attempt to raise fuel prices in the face of widespread public opposition in 2003. In contrast, protests following the much larger 2005 price increases did not come close to reaching critical mass.

Indonesia 17


Crime

Violent crime has been on the rise in recent years, but does not pose a serious threat to foreign business interests. Likewise, organised crime is seldom a threat to foreign business, although it thrives in the Indonesian underworld. Kidnapping has not traditionally affected foreigners, but separatist fighters in Papua have occasionally kidnapped non-Indonesians, and Islamist militants are now known to have considered this as a tactic. Extortion in the conventional sense does not affect foreign business in Indonesia. However, government officials typically demand illegal payment for permits, licences and other privileges, and the army or police often require additional payments for security arrangements.

Resources and infrastructure

Population

Indonesia is the fourth most populous country in the world after China, India and the US. The US Census Bureau estimates Indonesia!s population at 231.8m in 2006. Population growth in 2000-05 was 1.3% a year, compared with 1.5% in the 1990s, 2% in the 1980s and an average of 2.3% in the 1960s and 1970s. The falling rate of growth is in part the result of a successful family-planning programme introduced in the 1970s, which has reduced the fertility rate from 5.7 in the late 1960s to 2.6 in 1999. According to Indonesia!s 2000 census, which shows about 8m fewer people than the comparable figure published by the US Census Bureau for 2000, 30.4% of the population was under 15 years of age, compared with 36.6% in 1990 and 41.9% in 1980. In 2000 the number of people aged over 65 years stood at 4.6% of the population, up from 2.5% of the population in 1971.

About 95% of the population is of Malay origin, but there are over 300 minority groupings, including Melanesian, Polynesian and Micronesian. There are also an estimated 4m ethnic Chinese in Indonesia. The population is 87% Muslim, 10% Christian, 2% Hindu (mainly in Bali) and 1% Buddhist.

Population, 2005 (�000 unless otherwise indicated)

Age group Male Female Total % of total0-4 10,296 10,007 22,734 9.9

5-9 10,434 10,060 22,750 9.910-14 10,461 9,993 21,708 9.515-19 10,649 10,500 21,107 9.2

20-24 9,237 10,021 21,065 9.225-34 39,376 20,160 39,376 17.2

35-44 31,513 15,981 31,513 13.845-54 22,992 10,860 22,992 10.055-64 13,250 6,299 13,250 5.8

65+ 5,561 6,839 12,399 5.4Total 163,769 110,720 228,894 100.0

Source: US Census Bureau.

Population growth slows

18 Indonesia


Industrial development has brought large-scale migration to urban areas"42% of the population lived in cities in 2000, compared with 31% in 1990 and 22% in 1980. The population distribution also remains highly uneven. Despite attempts to ease congestion on Java, Bali and Madura through the now moribund transmigration programme, 60% of Indonesians lived on these three crowded islands in 2005, which make up only 7% of Indonesia!s land surface area. In 2005 the population density of West Java stood at an estimated 1,003 people per sq km; Bali was the second-most densely populated area, at 553 people per sq km. The population density of the capital, Jakarta, stood at 12,635 people per sq km. Outside Java and Bali population density averages less than 100 per sq km, with Papua having only six people per sq km.

Indonesia has made good progress on improving the welfare of its poorest citizens, but income distribution remains highly unequal. The number of people living below the nationally defined poverty line fell from 27% in 1999 to 17% in 2004. However, steadily rising rice prices in 2005-06, stemming from an import ban and adverse weather, led to a higher incidence of poverty, equivalent to 18% of the population (39m people), in 2006. Set against the standard international benchmarks, 7.4% of the population lived on less than US$1 per day in 2006. A further 42% of the population lived on between US$1 and US$2 per day, leaving them highly vulnerable to shocks in the economy. Many people in this category also lack access to basic services such as water and sanitation, and suffer from inadequate provision of healthcare and education. Poverty is concentrated in rural areas and in eastern Indonesia, although in absolute terms the largest number of poor people are concentrated in Java.

Recent trends in poverty (% of population below poverty line)

1999 2004National measure of poverty Total 26.9 16.7Urban areas 16.5 12.1Rural areas 33.7 20.1Spatial distribution Java-Bali 27.9 15.7Sumatra 20.1 17.5Kalimantan 22.9 11Sulawesi 25.1 16.7Other islands � 28.6Western Indonesia � 16.2Eastern Indonesia � 18.8

Source: Statistics Indonesia (BPS).

Education

Education improved greatly under the government of Soeharto from the late 1960s to the late 1990s, and as a result the proportion of the population over ten-years old who are illiterate fell from 39% in 1971 to only 8.1% in 2005. Education is compulsory for nine years and is free in theory. However, schools

Distribution remains highly uneven

Regional inequalities persist

Indonesia 19


levy increasingly high tariffs on education, to the point that a 2004 study by the Ministry of Education found that parents were paying between 54% and 74% of the cost of their children!s education. This has resulted in declining participation in education as children get older. Whereas 97% all children of eligible age (7-12 years) were attending elementary school in 2005, only 84% of eligible children (13-15 years) were attending middle school and 54% of eligible children (16-18 years) were attending senior school. Regional inequality is also evident: school attendance in Jakarta in 2000 averaged 9.6 years, compared with 5.3 years in Papua.

Concern at the declining efficacy of the education system is being addressed by the administration of Mr Yudhoyono. Under his direction, spending on education has risen from a low point of Rp21.5trn (0.9% of GDP) in 2004 to an estimated Rp50trn in 2007 (1.4% of GDP), reversing a trend that had seen little new investment in the education system since the 1997-98 Asian financial crisis. The government has also promised to meet a target of allocating 20% of total state expenditure to education by 2009, as required by the constitution.

There is an estimated 16% participation rate in tertiary education, compared with 29% in the Philippines and 41% in Thailand. The majority of tertiary institutions are privately-owned, although there is a network of state institutions around the country. The quality of tertiary colleges varies hugely, and many Indonesian students go abroad to complete their education.

Education statistics, 2005 (%)

Age group (years) No schooling Attending school No longer

attending school5-9 32.8 66.8 0.4

10-14 0.7 93.92 5.415-19 1.0 53.6 45.4

20-24 1.3 10.1 88.625-29 1.7 1.3 97.030-34 2.5 0.3 97.3

35-39 4.5 0.2 95.340-44 7.3 0.2 92.5

45+ 22.6 0.1 77.4Total 10.6 24.5 64.9


Health

Rapid improvements have been made to healthcare since the late 1960s. During the New Order period up to the late 1990s, health policy was concentrated on the establishment of public health centres in rural areas. Preventive healthcare, involving in particular the provision of clean drinking water, immunisation, pest control and improved nutrition, also received priority. Between the mid-1960s and the mid-1990s the number of public health centres increased from fewer than 1,250 to more than 7,000, supplemented by more than 28,000 auxiliary and mobile centres. The number of hospitals and medical staff

Spending on education gets higher government priority

An emphasis on basic health services has paid off

20 Indonesia


increased, but there are still only 0.7 medical staff per 1,000 people, and the level of 0.7 hospital beds per 1,000 people is low by regional standards and compares unfavourably with 0.8 beds per 1,000 in India.

The effects of investments made during the New Order period are illustrated by a decrease in the infant mortality rate from 145 per 1,000 live births in 1967 to 29.6 per 1,000 live births in 2005, and an increase in life expectancy at birth from 46 years to an estimated 67.4 years during the same period. The health service was hit badly by the 1997 East Asian financial crisis. Overall health spending fell by 7% in real terms in fiscal year 1997/98 (April-March) and by 12% in 1998/99. Ongoing constraints on public spending thereafter led subsequent governments to promote private healthcare provision, particularly at secondary and tertiary levels. According to the UN Development Programme, the government is now responsible for only 20% of expenditure on health"less than one-half of the average for the East Asia and Pacific region. After this long period of neglect, Mr Yudhoyono�s government has moved to address concerns that the health system is falling behind those in neighbouring South-east Asian countries, and in particular failing to meet the needs of the poor. Accordingly, spending on the sector has increased from Rp6.9trn in 2004 to Rp17.2trn in 2007.

Natural resources and the environment

Natural resources form the backbone of Indonesia!s subsistence and formal economies. Millions depend for their living on subsistence farming, fishing, and tree-crop and cash-crop cultivation. The country also has vast oceanic resources. Large industrial concerns have interests in the plantation sector and in the country!s once vast forests, which have been depleted by commercial logging since the 1970s (see Economic sectors: Agriculture). Rich deposits of oil, gas, coal, tin, copper, nickel, bauxite, gold, silver and iron sands, kaolin, marble, granite, limestone and pumice are the mainstay of an important mining and quarrying sector (see Economic sectors: Mining and semi-processing).

Despite the importance of natural resources to the economy, they are often exploited in a destructive, polluting, unsustainable and inefficient manner. Wealth generated from the exploitation of natural resources has not been distributed equitably, nor has it been wisely reinvested in the country. Even in national parks"which cover about 10% of the country"resource exploitation is heavy and unsustainable, owing to encroachment by logging companies, mineral prospectors and smallholder farmers. Environmental laws are openly flouted by the private sector, often in collusion with local and provincial government officials. Environmental destruction has intensified since Soeharto resigned from office in May 1998. The more general breakdown in law and order following the downfall of the Soeharto regime, coupled with economic hardship, led to a surge in illegal logging, mining and fishing, which has carried on despite the subsequent economic growth and reimposition of security

Air, water and ground pollution is increasing in Indonesia. The annual dry-season forest fires are a major contributor to air pollution and to global carbon dioxide emissions, of which Indonesia was the third-largest emitter in 2006.

Indonesia has vast endow-ments of natural resources

The environment faces grave threats

Indonesia 21


Inflammation of the respiratory tract is now the sixth-most common cause of death. Despite abundant rainfall and fresh water resources, access to clean water is decreasing. The country has one of Asia!s lowest rates of sewerage and sanitation cover, and consequently has the highest incidence of typhoid in Asia. Increasing water pollution is not only damaging human health but also fisheries, agriculture and coral reefs. Industrial effluents are one of the main causes of water pollution. Indonesia also lacks the means to deal with the population!s solid waste and open dumps are contributing to air pollution as well as the contamination of water supplies.

To improve water quality and infrastructure, the government has been seeking ways to promote greater private investment in the sector. To this end, the House of Representatives (DPR) adopted a controversial and long-delayed law in 2004 that allows water resources to be managed on a profit-making basis. However, this has not yet had the effect of encouraging new private investment, largely because of the widely publicised problems faced by two foreign firms, Thames Water of the UK and Lyonnaise of France, which took on concessions to manage the water supply in parts of Jakarta in 1997. The refusal of the city water authorities to increase water rates has left both companies facing losses. In late 2006 Thames Water announced plans to sell its interests in the concession, although this has still to be approved by the Jakarta administration.

In 2005, as part of its commitment to the Kyoto Protocol on climate change, the government established a Designated National Authority (DNA) within the State Ministry of Environment to register and approve projects seeking carbon emissions reduction credits under the Clean Development Mechanism (CDM). So far the DNA has approved 11 projects, of which eight, delivering over 1m tonnes of carbon dioxide reductions, have been approved by the UN-mandated designated world authority. CDM investments in Indonesia remain well below levels recorded in China and India.

Urban air quality is a growing concern. A survey conducted by the Environmental Impact Analysis Agency (Bapedal) in 2001 found that air quality in Jakarta and Bandung ranged from moderate to unhealthy. An earlier survey by Bapedal had found that transport accounted for 70% of total air pollution. As part of the Blue Sky project to improve air quality, the government has for several years been attempting to comply with the Euro II vehicle emissions standard. Meeting this standard requires all new motorcycles and light and heavy vehicles to use only unleaded fuel with sulphur content of less than 500 particles per millilitre. Although car manufacturers are now working to the requirements of Euro II, a renewed attempt to impose the standard in 2007 failed, owing to the unavailability of clean fuels. Diesel sold by the state oil company, Pertamina, still contains 3,500-5,000 sulphur particles per millilitre.

Transport, communications and the Internet

Infrastructure has been badly neglected since the 1997 economic crisis, impeding economic growth. Investment has been deterred by the generally low return on infrastructure projects, coupled with legal uncertainty and concerns

The government seeks to benefit from emissions trading

There is inadequate investment in infrastructure

22 Indonesia


about security and political stability. The government under the current president, Susilo Bambang Yudhoyono, has placed infrastructure firmly at the centre of its strategy to lift economic growth to an average of 6% over the next five years. At an infrastructure summit held for investors in Jakarta in January 2005, ambitious plans to invest up to US$145bn in infrastructure over the next five years were unveiled, with financing from the state, foreign donors and private investors. A follow-up event took place in November 2006, but persistent bureacratic delays and scepticism of recent reforms aimed at improving the business environment for infrastructure investments have meant that the private sector has yet to step forward with significant funds. Ten model projects showcased at the 2006 conference are not expected to reach full tendering until the third quarter of 2007.

Land transport depends mainly on road and, to a lesser extent, rail networks. In 2004 the total length of roads was 372,929 km, of which 55% was asphalt-covered. Railways cover approximately 3,100 km on Java and 1,300 km on Sumatra (the latter in three unlinked networks), and only 10% of this consists of double-track railway. Smaller rail networks also carry cargo and raw materials in parts of Kalimantan. Railways are operated by the state-owned Kereta Api Indonesia and the network is badly in need of new investment. A lack of investment and ageing infrastructure and rolling stock have been blamed for a recent sharp increase in accidents. Many railway crossings have no security gates, especially in rural areas, and at end-2003 it was reported that 31% of locomotives and 45% of coaches had been operating for more than 30 years. A new rail transportation bill passed by the DPR in early 2007 will allow the private sector to provide rail transportation for the first time. Government regulations are still required before the law takes effect, and the state will continue to set train fares. The new legal framework may encourage foreign investment in rail transport, particularly for a long-planned high-speed, 800-km rail link between Jakarta and Surabaya, the capital of East Java province.

Despite being an archipelago, Indonesia has a surprisingly small domestic ocean-going fleet, and lacks the port facilities to attract major vessels. Most cargo is transhipped at Singapore and arrives in smaller feeder vessels. However, the country!s main container port, Tanjung Priok in Jakarta (which handled 28% of exports and 42% of imports in 2005) is now partly under private ownership, and heavy investment is being made to upgrade its facilities. The volume of international sea cargo loaded in 2004 in Indonesia was 149.1m tonnes, down from 153.4m tonnes in 2003, while international sea cargo unloaded fell to 56.9m tonnes, down from 69.6m tonnes in 2003. The small ocean-going fleet is supported by an inter-island shipping fleet of 1,333 vessels with a total capacity of 27m deadweight tonnes, and a traditional fleet of 2,793 locally built sailing vessels with a total capacity of 397,616 deadweight tonnes.

Indonesia has 179 commercial airports, 61 of which are large enough for wide-bodied jets. The Soekarno-Hatta international airport at Cengkareng near Jakarta was officially opened in 1985 and, together with many other airports throughout the country, has been modernised and extended since then. Indonesia!s airlines developed rapidly in the early 1990s, and liberalisation of the sector in 2000 has since led to a proliferation of privately owned, mainly low-cost airlines. There are

Indonesia 23


currently two state-owned carriers, Garuda and Merpati. Passengers carried by the state-owned airlines rose to 16.1m in 2004, up from 7.6m in 2000. Passengers carried by privately-owned airlines rose from 2m to 13m in the same period.

The rapid growth in the number of airlines has been accompanied by growing fears over safety, highlighted by a spate of accidents in early 2007. On January 1st an Adam Air Boeing 737 carrying 96 passengers and six crew crashed into the sea west of Sulawesi, claiming the lives of all on board. The fuselage of a second Adam Air aeroplane suffered major structural damage upon landing in February and a Garuda Boeing 737 crashed and exploded after a hard landing at Yogyakarta in March, claiming a further 21 lives. Several ferry disasters, including a capsizing that claimed around 470 lives in late December 2006 and a fire that claimed around 80 lives in February 2007 have also highlighted poor safety at sea. In response to these disasters, the government has established a team to review the safety of maritime and aviation safety. Corruption, weak regulation and lax enforcement of safety rules are thought to be responsible for the majority of accidents.

The government-owned telephone system covers almost the entire country, and has been greatly extended and made more efficient since the mid-1970s by the deployment of telecommunications satellites. This satellite system also provides connections to the international direct dialling network. There was a sharp increase in telephone lines from 1.4m in 1992 to 4.7m in 1997, but investment has slowed since the 1997-98 economic crisis, and in 2005 there were a total of 10.2m fixed-line subscribers, equivalent to a ratio of just 4.6 fixed lines per 100 people. This low teledensity does not fully reflect the actual degree of coverage provided by the existing network, which is greatly expanded by around 220,000 wartel (telephone kiosks) located in even the most remote areas.

The two largest telecoms companies in Indonesia are Telekomunikasi Indonesia (Telkom) and Indosat, which are 65% and 16% state-owned respectively. Although both are under partly private ownership, there remains a 49% cap on foreign ownership of telecoms companies. Singapore Technologies Telemedia purchased a 41.9% stake in Indosat in December 2002. Telkom has traditionally been the domestic telecoms provider and is engaged in the voice, data and image communication sectors. It dominates the telecoms infrastructure with 7.2m lines. The much smaller Indosat has historically provided international telecoms services. However, since August 2002 the two firms have been allowed to compete in the local-calls market as the result of liberalising reforms.

In recent years mobile telephony has surpassed fixed-line technology, as it does not require the same heavy investment in infrastructure. The number of mobile subscribers surpassed fixed-line subscribers in 2002, rising to an estimated 65m in 2006, compared with 6.5m in 2001. Telkomsel, the mobile telephone division of Telkom, is the largest operator, with around 35m subscribers in 2006. Indosat is the second-largest operator, with 16m subscribers, followed by Excelcomindo with 9m.

Mobile networks extend telephone penetration

24 Indonesia


Personal computer (PC) penetration is low by regional standards. Data from an industry body, the Indonesian Computer Association, suggest that PC penetration was as low as 11.4 per 1,000 population in 2005, although there are 40 Internet service providers (ISPs). Computers are assembled locally, but Chinese-made PCs have recently entered the market and are considerably cheaper than either locally made computers or imports from Japan and the US. Of the 40 ISPs, 97% are located in Jakarta; they provide web-hosting, e-commerce and VoIP (voice over Internet protocol) services. The use of the Internet for trade transactions is still low, but it is not just the low Internet penetration rate that prevents faster growth in e-commerce, but also the cash-based nature of the Indonesian economy and the low level of credit-card use. Concerns about the legality of transactions, intellectual property, consumer protection and import duties are also deterring use of the Internet for trade.

Energy provision

Indonesia is endowed with a wide variety of energy sources. It has large, although declining, petroleum reserves and significant reserves of natural gas and coal. It also has great potential for the development of hydroelectric and geothermal power as well as non-conventional sources of energy, such as wind and wave energy and solar power.

Indonesia is a member of OPEC, although declining reserves, and falling output and exports, have raised questions about the country!s continued membership of the cartel. Investment in exploration has fallen sharply, owing to legal and contractual uncertainties, and production and exports have fallen sharply. Oil production fell to 1.01m barrels/day in 2006, compared with 1.06m b/d in 2005 and a peak of 1.69m b/d in 1977. Net exports fell to a daily average of 33,000 b/d in 2005, down from 100,000 b/d in 2003, and Indonesia was reduced to the status of net oil importer in 2006.

The majority of proven reserves are onshore and consist of light, low-sulphur crudes, which command a premium over heavy crudes produced in the Middle East. The two main export crude oils are Sumatra Light and Duri crude. There are more than 2,500 km of crude oil pipelines in Indonesia, as well as nearly 500 km of petroleum-product pipelines and more than 1,700 km of natural gas pipelines. Riau, where the large Duri and Minas oilfields are located, is the leading oil-producing province. Other significant oilfield development and production areas are offshore from north-western Java, the Cepu field in eastern Java, East Kalimantan and the Natuna field in the South China Sea.

Oil and gas exploitation takes place through production-sharing contracts with the state oil and gas company, Pertamina. Indonesia!s existing fields are ageing rapidly, and a lack of new investment in exploration, brought about by legal and regulatory uncertainty, has resulted in the rapid decline in output witnessed in recent years. Investment in exploration fell to a record low of US$500m in 2004. However, future production will be boosted by the Cepu field in eastern Java. The field has recoverable reserves of up to 600m/b of oil

Investment in exploration falls on regulatory uncertainty

Internet usage is at a low level

Indonesia has a diverse energy base

Oil faces long-term decline

Indonesia 25


and 1.7trn cu feet of gas, with potential to produce up to 170,000 b/d of oil from 2009. The project was delayed by four years of acrimonious negotiations over the terms under which Pertamina and ExxonMobil, a US oil company, would operate the concession. The dispute was finally resolved in early 2006, and the government hopes this will have a knock-on effect in attracting more oil companies to invest in further exploration. There are some signs that this is now happening. Twenty-two new concessions came into production in 2006 and a further 32 are under development.

In the downstream oil and gas sector, liberalisation is proceeding along the lines set out in the 2001 oil and gas law. The downstream monopoly enjoyed by Pertamina since 1971 was lifted in 2005, although the state company will remain dominant for many years to come by virtue of its existing infrastructure and market presence. Private companies are now allowed to open retail outlets for fuel. Shell, an Anglo-Dutch oil company, and Petronas of Malaysia are prominent among the foreign oil companies now building up a retail presence in Indonesia. Pertamina!s monopoly on importing and distributing fuel has been lifted, and refining, storage and transport have been liberalised. Regulation of the downstream sector has been taken over by the Downstream Oil and Gas Regulatory Agency (BPH Migas).

Pertamina currently operates nine refineries with total capacity of around 1m b/d. No new capacity has been added since 1994, leading to an ever greater dependence on imported finished petroleum products, which currently account for around 30% of the country�s total fuel needs. To address this situation, investments are now being made to expand domestic oil refining capacity. In August 2006 the company announced a US$11bn programme to expand its refining capacity to reduce dependence on imports, and has since unveiled five major projects that will add 900,000 b/d to its existing capacity by 2012. The projects consist of three new refineries and expansion of two existing facilities.

Proven natural gas deposits increased to 97.4trn cu ft in 2005, up from 94.8trn cu ft in 2004. Production was about 2.7trn cu ft in the same year. Most of its natural gas reserves are located near the Arun field in North Sumatra, around the Badak field in East Kalimantan, off the coast of Java, in Papua and in the Natuna field in the South China Sea. Indonesia was the world�s largest exporter of liquefied natural gas (LNG) for a 30-year period that ended in 2006, when it was overtaken by Qatar. Typically, 70% of its LNG exports go to Japan, 20% to South Korea and 10% to Taiwan. The country has traditionally relied on oil to supply its own energy needs, but rising oil costs have led the government to encourage greater domestic use of gas in recent years. A natural gas distribution infrastructure is being developed for the domestic market, and a medium-term policy to reduce exports from 2010, when major export contracts with Japan expire, has been announced. Thereafter, producers will be required to allocate 42% of production to be sold on the domestic market, where prices are substantially below world market levels. To ensure that the sector remains attractive to investors, the new policy will also provide companies with flexibility to charge higher prices for domestic sales, as well as offering a range of tax incentives.

Gas production is rising

26 Indonesia


Estimates of Indonesia�s coal reserves vary from 5.9bn tonnes (proven) to 36bn tonnes (unproven). Around 59% of Indonesia�s coal reserves consist of lignite and the remainder of anthracite. Major known reserves are located in Sumatra and Kalimantan. The world!s largest coal mine, Kaltim Prima Coal (KPC), is located in north-eastern Kalimantan and generates US$450m in coal export revenue a year. Coal production is growing rapidly, with output rising from 27.6m tonnes in 1993 to 76.8m tonnes in 2000 and 167m tonnes in 2006. Japan and Taiwan are the main markets for Indonesian coal, but South Korea, the Philippines and Hong Kong are also major importers. Indonesia is now the world�s second-largest exporter of steam coal after Australia and may overtake that country in 2007. Looking forward, exports will have to compete increasingly with growing domestic demand for coal, as companies replace oil with coal as their main fuel source.

Indonesia produces about 100bn kwh of electricity annually. Some 55% of households were electrified in 2004, and average consumption stood at 478 kwh per head in 2006. Demand for electricity has risen sharply in recent years, growing at rate of around 11% a year between 2002 and 2006 in the main consuming regions of Java and Bali. There are regional discrepancies in service provision, with the majority of electrified households located in urban areas. Provision of electricity is the responsibility of the state electricity company, Perusahaan Listrik Negara (PLN). PLN is plagued by inefficient management, bad business practice and corruption, and operates in a perpetual state of near-bankruptcy.

A lack of investment in power generation since the 1997-98 economic crisis has left the country facing a growing shortage of electricity. Installed capacity on the main Java-Bali grid is 19,615 mw, but useable capacity is only 15,500 mw, while peak demand rises to 14,500 mw. The constraints in the system were brought into sharp relief in August 2005, when electricity supplies failed in Jakarta and large parts of Java and Bali, resulting in massive disruptions to transport and business throughout the affected region. Other parts of the country have also been subject to frequent blackouts in recent years.

New generating capacity of around 2,400 mw is required annually to meet the needs associated with annual economic growth of 6%. PLN estimates that investment of US$41bn is required to develop electricity infrastructure in 2006-15, including US$26bn for power generation, US$7bn for transmission facilities and US$8bn for distribution.

Investment in power generation has in recent years been discouraged by legal and contractual uncertainty. The risks in the sector were brought into sharp relief by lengthy disputes over the 27 independent power producer contracts which PLN entered into prior to the 1997-98 Asian financial crisis. A freeze on power tariffs, in place since 2002, has also served to deter investors. The government had signalled its intent to raise tariffs in 2006, but was unwilling to inflict further energy price rises on consumers, following sharp fuel price increases in 2005. Tariffs are now likely to be left unchanged until after the 2009 election, complicating efforts to develop new generating capacity.

Indonesia's reserves of coal are being developed

Electricity supply is barely sufficient

Indonesia 27


Nevertheless, some progress is now being made towards increasing generating capacity. Initial efforts are focused on a US$8bn crash programme to develop 10,000 mw of coal-fired generating capacity by 2009. The 10,000 mw of capacity will be spread between ten large power stations on Java and 30 smaller power stations outside Java. The plants on Java will account for 7,000 mw of capacity, costing an estimated US$5.6bn. Tendering for the Java power stations was launched in July 2006, with tendering for the other power stations beginning in December of the same year. Much of the financing and engineering for the crash programme to build new coal-fired generating capacity is likely to come from China.

PLN!s difficulties have been compounded by a heavy reliance on oil-based fuels, which have risen sharply in cost in recent years, and a cap on electricity tariffs that has been in place since 2003. PLN relies on diesel and fuel oil for 30% of its needs, coal (40%), natural gas (19%), geothermal (5%) and hydropower (6%). Rising oil prices and serious financial problems have forced the company to take urgent measures to reduce dependence on oil-based fuels, which it aims to cut back to 8% in 2007 and 3% in 2009, with the shortfall made good through coal and natural gas diverted away from exports to the domestic market.

Further diversification may also come in the future through Indonesia�s first foray into nuclear energy. Plans to develop nuclear power in Indonesia have been a long time in development, but were shelved during the 1997-98 Asian financial crisis. However, rising oil prices and concerns over future energy security have once again brought nuclear power onto the agenda. The government now intends to develop Indonesia�s first nuclear plan on the Muria Peninsula in Central Java by 2016. A tender for the 1,000 mw plant is due to be launched in 2008. The International Atomic Energy Agency has given its backing to the plans. However, environmentalists have raised concerns over the dangers posed by a nuclear power plant sited on a seismically active and densely populated island.

The economy

Economic structure Main economic indicators, 2006 (Actual unless otherwise indicated)

Real GDP growth (%) 5.5

Consumer price inflation (av; %) 13.1

Current-account balance (US$ m) 9,647.3a

Exchange rate (av; Rp:US$) 9,159.3

Population (m) 231.8a

External debt (year-end; US$ m) 126,368.4a

a Economist Intelligence Unit estimates.

Source: Economist Intelligence Unit, CountryData.

Indonesia has a well-balanced economy, in which all major sectors play an important role. Agriculture (including animal husbandry, fishing and forestry) has historically been the dominant activity in terms of both employment and

The economy is diversified

28 Indonesia


output. The country has a vast range of mineral resources, which have been exploited rapidly over the past three decades, enabling the mining sector to make an important contribution to the balance of payments. The manufacturing sector began a rapid expansion in the mid-1980s, and in 1991 the share of manufacturing in GDP exceeded that of the agricultural sector for the first time. Recently, the services sector has expanded, boosted by the tourism industry, and in 2005 it accounted for 41% of GDP and employed about one-third of the working population.

Comparative economic indicators, 2006 Indonesiaa Malaysiaa Thailand b Indiaa Chinaa

GDP (US$ bn) 364.5b 148.9b 206.2 915.7 2,719.1

GDP per head (US$) 1,572 5,591b 3,125 a 836 2,069

GDP per head (US$ at PPP) 4,003 11,342 9,082 a 3,914 7,532

Consumer price inflation (av; %) 13.1b 3.6b 4.6 6.2b 1.7b

Current-account balance (US$ bn) 9.6 23.0 3.2 -10.0b 249.9b

Current-account balance (% of GDP) 2.6 15.5 1.6 -1.1 9.2

Exports of goods fob (US$ bn) 102.7 160.0 128.2 121.5b 969.7b

Imports of goods fob (US$ bn) -73.0 -125.7 -113.4 -185.3b -751.9b

External debt (US$ bn) 126.4 51.0 59.9 a 130.5 315.4

Debt-service ratio, paid (%) 19.4 4.9 8.7 a 7.9 2.8

a Economist Intelligence Unit estimates. b Actual.

Source: Economist Intelligence Unit, CountryData.

Low levels of domestic disposable income meant that exports were the primary engine of growth throughout the 1970s and 1980s. Before the mid-1970s exports consisted mainly of a small number of primary commodities, including natural rubber, coconut oil and copra, tin and crude oil. The decline in petroleum prices after 1983 resulted in a concerted push towards industrialisation, as a result of which semi-processed and manufactured products, particularly textiles, increasingly came to dominate exports. A determined effort to promote tourism since the mid-1980s has also had a big impact on services export earnings.

From the early 1990s domestic consumption became an increasingly important driver of economic growth. Consumer spending helped to ease the economy out of recession in the late 1990s and has since been one of the main engines of growth, compensating for sluggish investment and a slump in the export-oriented manufacturing sector.

Economic policy

Strong GDP growth between the mid-1980s and the late-1990s obviated the need to address the growing need for economic reform, but this led to the creation and toleration of a range of distortions that partly explain the crash of 1997-98. Investment became increasingly concentrated in import-dependent manu-facturing and in property development. By contrast, investment to create backward linkages in manufacturing and the agricultural sector was neglected. This misallocation of investment was encouraged by the breakneck speed and poor regulation of the expansion of the banking system after the reform package of October 1988 (see Economic sectors: Financial services).

A range of distortions partly explain the 1997-98 crisis

Exports provide the main impetus for growth

Indonesia 29


The rapid pace of development also translated into widening current-account deficits and large-scale foreign borrowing by corporations and banks, much of it short-term. The need to finance the deficits and to meet debt-servicing obligations distorted the domestic interest-rate structure, with negative impli-cations for the real economy. Further layers of distortion were introduced by the maintenance after 1996 of an exchange-rate system in which the rupiah was linked to a strengthening US dollar, and by the continuing regulation of foreign and domestic trade. These two factors contributed significantly to the slow-down in export growth that began in the mid-1990s. The link between the US dollar and the rupiah also created a false sense of security, and convinced private entities seeking overseas credit that they did not need to hedge their borrowings. The rush of debtors to cover their unhedged obligations created the conditions for the initial collapse of the rupiah in July-September 1997.

Indonesia!s economic policy performance over the five years from 1998 to 2003, under the supervision of the IMF, can be summarised as having been successful in the implementation of macroeconomic policy, but disappointing on structural reform. Major reforms, in particular privatisation and bank restructuring initiatives, were repeatedly delayed, leading to strained relations between the government and the Fund, which was called in to assist with recovery from the 1997-98 crisis. This was primarily because of an assertive and populist parliament, which had to approve many aspects of economic policy. However, some progress was made under the government of Megawati Soekarnoputri, particularly on the divestment of nationalised banks by the Indonesian Bank Restructuring Agency. A law against money-laundering was also passed and an anti-corruption committee established, and in early 2004 a new bankruptcy law was enacted with the aim of simplifying the process and making it more transparent. The IMF programme drew to a close at the end of 2003, to be replaced by a post-IMF economic policy framework that emphasises building on macroeconomic stability, strengthening the financial sector, and strengthening investment, exports and employment.

The government!s track record in pursuing fiscal stabilisation has been impressive since 1997, despite the high cost of bank recapitalisation and the temptation to monetise budget deficits. The ratio of government debt to GDP has consistently declined since 1998, falling to around 42% in 2006. Until end-2003 the government was helped by debt rescheduling agreements that reduced the debt-servicing bill. From the beginning of 2004 Indonesia met its obligations in full, but in 2005 it benefited from a moratorium on repayments offered by the Paris Club of official creditors to countries affected by the Indian Ocean tsunami disaster at the end of 2004. The government has also been active in re-profiling its domestic debt, extending the average maturity of the debt through monthly bond swaps. A stronger rupiah and falling interest rates in 2002-04 helped to keep the budget deficit from growing.

The 2005 budget deficit came in below the target of 0.7% of GDP, at between 0.5% and 0.6% of GDP, as a result of large undisbursed allocations in development spending. This underspend came despite a serious budgetary crisis earlier in the year as the government attempted to maintain high fuel

Five years of IMF supervision follow the 1997-98 crisis

Cuts to fuel subsidies avert a fiscal crisis

30 Indonesia


subsidies in the face of rocketing global oil prices. A looming fiscal crisis eventually forced the government to raise fuel prices by an average of 126% from October 1st, following an earlier 29% increase introduced in March. Spending on fuel subsidies in the 2005 fiscal year rose to Rp95.6trn (US$9.9bn), compared with development spending of only Rp53.6trn.

In 2006 an unexpectedly strong currency in the first quarter of the year, high interest rates and rising oil prices again substantially altered the basis of revenue, spending and financing projections, leading to a major mid-year revision. Although the deficit was maintained at around 1% of GDP, problems on both the revenue and expenditure side of the budget were evident, with both tax receipts and disbursements falling well short of target. The shortfall in taxes reflects a failure of attempts to broaden the tax base and improve tax collection. The shortfall in disbursements reflects a chronic failure to approve development spending on infrastructure, health and education. This has been a persistent feature of recent budgets, and can be explained by slow administration and bureaucratic inefficiency, delays in securing approval of provincial and district budgets (which account for a growing share of overall government spending), investment of development funds in promissory notes issued by Bank Indonesia (BI, the central bank) and a reported reluctance on the part of officials to approve spending for fear of later coming under scrutiny in corruption investigations.

Unrevised 2007 budget (Rp trn unless otherwise indicated)

Revenue Total revenue 723.1Tax revenue 509.5Non-tax revenue 210.9Expenditure Total spending 763.6Central government spending 504.8 Capital expenditure 76.8 Interest on debt 85.1 Subsidies 103.0Funds for regional autonomy 258.8Financing Budget deficit (% of GDP) -1.1Budget deficit -40.5Net foreign financing of deficit -10.5Domestic financing of deficit 51.0Privatisation revenue 2.0Asset recovery 1.5

Source: Ministry of Finance.

In March 2004 the government returned to the international debt market for the first time since the 1997-98 financial and economic crises. A US$1bn ten-year bond issue was launched"more than double the size of the US$400m issue that the government originally proposed"with a 6.75% coupon. The government raised the size of the issue following an enthusiastic initial response from investors. This was followed in March 2006 by a second US$2bn in a global debt issue; again, the market response was so positive that the issue

Indonesia returns to the international capital markets

Indonesia 31


was doubled in size and still remained nearly four times oversubscribed. A further US$2bn bond issue is planned in 2007 to meet external borrowing requirements on the 2007 state budget. The government also started issuing bonds to retail investors for the first time in 2006, in a move aimed at widening its sources of finance. Retail bond sales raised Rp3.3trn (US$360m) in 2006 and a further Rp6.2trn in March 2007.

External trade has traditionally been subject to a variety of levies and controls. From the mid-1980s, partly in response to a deteriorating balance of payments, successive governments began to replace non-tariff barriers with a more transparent tariff regime, and started a gradual reduction in the degree of tariff protection granted to domestic producers. Nevertheless, a wide range of duties and taxes, quantitative controls, sole trading licences and other restrictions remained in place on the eve of the 1997-98 Asian financial crisis. The most distorting of these controls were abolished through conditions attached to the IMF�s post-crisis package of assistance, and the current government remains broadly committed to a market-based trade policy. However, certain important commodities remain subject to a regulated trading regime, including rice, the main food staple, which is subject to an import ban aimed at protecting domestic agriculture. Since the introduction of regional autonomy in 2001, domestic trade has in some cases been disrupted by local regulations that impose taxes and levies on the inter-district, inter-provincial or inter-island movement of goods. The current government is currently reviewing and revoking all such regulations.

Trade policy has also become more liberal as a result of the Association of South-East Asian Nations (ASEAN) Free Trade Agreement (AFTA), which took effect on January 1st 2002. Under its obligations to AFTA, tariffs of 0-5% now apply to all intra-ASEAN trade. Further to this, ASEAN leaders agreed in January 2007 to establish a free-trade zone by 2015, ten years ahead of schedule. In December 2006 ASEAN trade ministers also signed three agreements aimed at eliminating duties on 3,523 tariff lines from January 1st 2007, simplifying customs procedures, and eliminating all non-tariff barriers in three phases from 2008-10. Prospects for a full economic union still remain uncertain, however, as the member states have shied away from a regional free market, instead allowing �flexibilities� for exporters and manufacturers in sensitive industries.

Indonesia operates an essentially free investment regime for foreign investors, with foreign investment permitted in virtually all sectors of the economy. However, foreign direct investment has declined precipitously since the 1997-98 economic crisis, with investors deterred by legal and contractual uncertainty and rising costs. Some of these concerns may be addressed by a new investment law, passed by the House of Representatives (DPR, the legislature) in March 2007. The new law provides for equal legal status for domestic and foreign investors and codifies the use of international arbitration in contracts. The bill also contains provisions aimed at reducing the cost and time required to set up a business in Indonesia to 30 days, from the current average of 97 days. Implementing regulations are still required to put these measures into practice.

IBRA closes its doors Trade policy is broadly liberal

Trade with South-east Asian states has been liberalised

Liberal policy fails to stem a decline in investment

32 Indonesia


Economic performance

Prudent economic management enabled Indonesia to record consistently high rates of economic growth, well in excess of the expansion in population, for more than two decades. This growth, which averaged more than 6% a year between 1970 and 1996, was achieved despite a number of external shocks, including sharp movements in oil prices and in international exchange rates, which affected the terms of trade and the value of the country!s external debt. From a low-income country in the mid-1960s, Indonesia transformed itself into a middle-income country, with an estimated income per head of almost US$1,250 in 1996.

A breakdown of the economy!s growth performance by sector shows that industry was the principal engine of growth. Manufacturing expanded more rapidly than the economy as a whole. The need to ensure matching growth in infrastructure stimulated a sharp acceleration in the rate of growth of the utility and construction sectors. The electricity, gas and water component of GDP expanded by an average of around 14% a year between 1986 and 1996, while the construction sector expanded by more than 10% a year in the same period.

The growth of the other sectors, although not as dramatic, was also impressive. Agriculture grew steadily, although the food-crop subsector was held back for much of the 1990s by unfavourable climatic conditions and the increased conversion of paddy fields to other uses (see Economic sectors: Agriculture). The expansion of the mining sector also began to slow in the early 1990s as a result of the gradual depletion of known petroleum reserves. This decline in the oil industry was partly offset by the rapid expansion of a number of other mining activities, including coal, copper and gold. The services sector also grew rapidly, fuelled both by the demand generated by the expanding primary and secondary industries and by the growth in personal disposable incomes, the effect of which was reinforced by the booming tourism industry.

As a result of the economic crisis, GDP growth first slowed to 4.7% in 1997 and then contracted by 13.1% in 1998, the worst performance since records began. Declines in output were broad-based, but the worst-affected sectors were construction (down by 36.4%), trade, financial, real estate and business services (down by 26.6%) and hotels and restaurants (down by 18%). In 1999 the economy returned to growth, but only just, expanding by 0.8%. Recovery from the crisis began in earnest from 2000, fuelled by strong household and government consumption, but growth has still not risen above 6% in any year. Average annual growth in 2002-06 was 5.1%.

Gross domestic product (% real change)

Annual average 2006 2002-06GDP 5.5 5.1


Economic growth was rapid for more than two decades

Industry sets the pace

The economic crisis sets off a deep contraction

Indonesia 33


Real GDP grew by 5.5% in 2006, falling short of the government�s revised target of 5.8%. Strong growth in exports and government spending were insufficient to offset weaker consumer spending and investment in the first half of the year. However, growth averaged 6% year on year in the last two quarters of 2006, and was 6% in the first quarter of 2007, suggesting that the economy is once again growing strongly. Importantly, consumer spending and investment have led the recovery. Private consumption expenditure rose to 4.5% year on year in the first quarter of 2007, its fastest rate since the fourth quarter of 2004, with consumers gaining heart from falling interest rates and lower inflation. Investment (gross fixed capital formation) growth was 7.5% year on year in the first quarter, only slightly down on the rapid growth rate of 8.2% achieved in the fourth quarter of 2006. It has been aided by strong expansion in construction and domestic capital goods production. Meanwhile, export growth accelerated to 9% in the first quarter of 2007, up from 6.1% in the final three months of 2006.

Throughout the 1980s and much of the 1990s the broadly conservative stance adopted by the monetary authorities restrained inflationary pressures in the economy with relative success. The onset of the crisis in 1997-98 led to an episode of severe inflation (which averaged 57.6% in 1998), driven by the collapse of the rupiah, the breakdown of production and distribution, and the rapid expansion of the money supply to finance subsidies and keep banks liquid. However, in 1999 the return of macroeconomic stability, together with negligible economic growth, brought inflation rapidly back down to an annual average rate of 2%, stabilising thereafter at an annual average of around 8%.

Inflation then rose sharply in 2005, as a result of a decision to raise fuel prices first by an average of 29% in March and then by a further 126% in October. The increases were made necessary by rising global oil prices, which rendered domestic fuel subsidies unsustainable. The second of these increases drove the consumer price index to a six-year high of 18.4% year on year in November. Higher interest rates then helped to bring inflation back down from this peak in the course of 2006, taking it to an average of 13.1% during the year and 6.6% at the year end, by which point the base effects of the October 2005 fuel price increases had dropped out of the year-on-year calculation.

Rising inflation led to pressure for larger increases to provincial minimum wages for 2006. Provincial tripartite wage councils agreed on average increases of 17%. Unions argued that wage rates were failing to keep pace with inflation, leaving workers worse off in real terms. Announcements of generous salary increases for legislators, government officials and public-sector employees in 2006 also added to their frustration. The Jakarta minimum wage was increased by 9.6% in 2007, reflecting the lower rate of inflation prevailing at the end of 2006, when bargaining takes place.

Weak investment holds back growth in 2006

Inflation was held at manageable rates

Fuel subsidy cuts stoke inflation in 2005

34 Indonesia


Inflation (%; av)

Annual average 2006 2002-06Consumer price inflation 13.1 9.7

Source: Bank Indonesia.

Unemployment rose sharply with the onset of the 1997-98 financial crisis and remains a serious problem, despite recent macroeconomic stability and steady economic growth. Overall unemployment was running at 11m people, or 10.8% of the workforce, at end-2006, compared with 4.7% at the start of the 1997-98 financial crisis. Recent job losses have been concentrated in traditional labour-intensive industries, including timber, wood-processing, textiles and garments. As these sectors are seemingly in irreversible decline, reforms to encourage alternative employment are urgently required. A further 35m workers are classified as underemployed and work fewer than 35 hours per week.

Migrant workers provide a partial solution to unemployment. In recent years Indonesia has exported a large number of migrant workers to the Middle East, Taiwan, Hong Kong and Malaysia. As of 2006 the country had 2.7m officially registered migrant workers, with many more leaving to work abroad"particularly in Malaysia"without first registering with the authorities. Remittances from overseas labour are an increasingly important source of inflows, amounting to US$3.9bn in 2006. However, despite this important role, Indonesia�s migrant workers receive virtually no official support and are often subject to abuses by their employers abroad and to harassment and extortion by low-ranking government officials upon their return home. This situation will need to be rectified if migrant workers are to be used as a permanent solution to domestic unemployment.

Foreign direct investment (FDI) grew strongly in the 1980s and early 1990s, with the value of FDI project approvals peaking at US$39.9bn in 1995. The economic crisis and political unrest then had a devastating impact on investment, with approvals falling to a mere US$9.8bn in 2002. Domestic investment also suffered. In 1997 projects worth Rp119.9trn were approved, falling to just Rp25.3trn in 2002. Recovery from this nadir has been slow, with new investment deterred by corruption, an unsettled labour market, poor infrastructure and a weak legal system. These factors continued to affect investment in 2006. Although FDI projects approved by the Investment Co-ordinating Board (BKPM) in 2006 rose by 15% to US$15.6bn, realised foreign investment fell by 33% to US$5.9bn. Domestic investment was similarly affected, with approvals rising by over 300% to Rp163trn, although actual investment fell by 32% to Rp21trn.

The government will hope that an important new law on investment, passed in early 2007, will transform this fitful recovery into stronger and more sustained growth. The new law, which is a crucial component of the current government�s economic reform agenda, will usher in several important changes once the necessary implementing regulations are in place. Important aspects of the new law include equal legal status for foreign and domestic investors;

Unemployment has risen sharply

Migrant workers are a partial solution

The business environment deters investment

Indonesia 35


protection against nationalisation and expropriation; the right to repatriate earnings in foreign currency; the abolition of compulsory divestment and limited duration provisions; international arbitration for disputes; tax incentives for certain types of investment; and stronger land title rights for foreign firms.

Regional trends

Java and Bali have enjoyed the fastest rates of growth in Indonesia, leading to a concentration of wealth in these densely populated islands. In 2005 (the latest year for which data are available) the island of Java accounted for 59.3% of Indonesia�s GDP, while the tiny island of Bali accounted for 1.3% of GDP.

This inequality, and a perception that Java!s rapid development was fuelled by the exploitation of other regions! natural resources, created resentment in resource-rich parts of the country. To stem this resentment, wide-ranging regional autonomy was introduced in 2001, granting district governments authority over all areas of policy except monetary affairs, foreign relations, justice, religion, security and defence. The financial balance between the centre and the periphery was also altered: the central government undertook to transfer at least 26% of state revenue to district and provincial governments; local governments were given authority to issue bonds and levy limited taxes; and districts were guaranteed a 15% share of oil and gas revenue and an 80% share of revenue from forestry and fisheries.

As a result of these changes, Indonesia!s tremendous ethnic, religious and cultural diversity is now more accurately reflected in local politics and policy. A further degree of special autonomy has been granted to Indonesia!s extreme western and eastern provinces. The strongly Islamic province of Aceh has been granted substantial powers under a peace settlement concluded in 2006; and a Papua People!s Council has been established to represent indigenous Papuan culture, which is tribal and encompasses both Christian and animist beliefs.

Regional autonomy, and in particular the greater share of natural-resource revenue granted to local governments, has begun to reverse the inequalities in growth between Java and the outer islands and to create a new set of inequalities between resource-rich and resource-poor regions. In 2005 several resource-rich provinces on the islands of Sumatra and Sulawesi, along with Papua and West Papua, recorded annual growth in excess of 6%. However, regional autonomy has also exacerbated inequalities between resource-rich and resource-poor provinces. In 2004 GDP per head of population in East Kalimantan, which is rich in oil, gas and timber, was Rp47.7m (US$5,207), while in North Maluku, the poorest province, income per head was Rp2.7m. Autonomy has also resulted in differences in quality of government service delivery across districts, as well as the emergence of localised differences in the business environment.

Regional patterns of development are unequal

36 Indonesia


Economic sectors

Agriculture

Agriculture, including forestry and fishing, is of vital importance to the Indonesian economy. It is both an important source of export earnings and formal employment, and the means by which the majority of Indonesia!s rural population subsists. In the subsistence part of this economy wages are in the form of crop shares and a large portion of food crops are for home consumption. The share of GDP contributed by agriculture has declined as Indonesia has industrialised. In the early 1970s agriculture contributed 40-50% of constant-price GDP, but by 2006 it had fallen to 14.1%.

Rice is the main food staple in most areas, with the exception of some parts of eastern Indonesia, where the sago palm is more suitable for cultivation. Indonesia is the world!s third-largest producer of rice. Self-sufficiency was briefly attained in 1985 and again in 2004, but in the intervening years Indonesia was one of the world!s largest rice importers. The main rice-producing regions are the fertile islands of Java and Bali, where industrialisation and high population density have resulted in the loss of large swathes of arable land. Indonesia lost a total of 1m ha of rice paddy between 1983 and 1993. To reverse this trend, the government has been developing paddy in the less fertile provinces of Riau, Jambi, South Sumatra, Bengkulu and West Kalimantan.

Owing to low rice prices, in January 2004 the government succumbed to pressure from producers and announced that rice imports would be banned for six months to protect farmers during the main harvest. The ban has since been extended on several occasions and remains in place. The restriction on imports has stoked domestic prices, which rose by an average of 33% between February 2005 and March 2006. The higher prices have hit Indonesia�s poorest citizens hard, who spend a disproportionately large share of their disposable income on rice. The government softened the import restrictions in early 2006 by allowing limited quantities to be imported, but has resisted pressure to revoke the ban for fear of alienating the country�s agricultural lobby. In 2006 Indonesia produced 54.4m tonnes of unhusked rice, equivalent to 32.6m tonnes husked. Domestic requirements are estimated to be around 32m tonnes.

In recent years palm oil production has expanded rapidly, and Indonesia may overtake Malaysia as the world!s largest producer of this commodity in 2007. Indonesia and Malaysia together account for around 85% of global palm oil production. The planted area in Indonesia increased from only 106,000 ha in 1967 to 3.7m ha in 2006, and more than 2m people are now employed in the subsector. Crude palm oil (CPO) production rose from 168,000 tonnes in 1967 to 10.9m tonnes in 2006, of which around 75% was exported. About 80% of local CPO consumption is accounted for by the cooking oil industry, 10% by the oleo chemical industry, 3.1% by margarine production, and the remainder by other industries, largely soap manufacturing. Production has recently been boosted by China!s removal of import quotas on edible oils and growing demand for CPO in biofuel production.

Agriculture is of crucial importance

Rice is the main food crop

Palm oil cultivation is growing in importance

Indonesia 37


Indonesia was once the world!s largest producer of natural rubber. After a period of neglect and decline in the 1960s and early 1970s the planted area was expanded and existing plantations rehabilitated through the introduction of new, high-yielding varieties. Total output rose from 736,000 tonnes in 1968 to 2.4m tonnes in 2006, of which smallholder production accounted for over 1.4m tonnes. Indonesia now lies second in the list of world producers, between Thailand (the largest) and Malaysia; the three countries account for 85% of world supply. To combat low prices following the demise of the International Rubber Organisation in 1999, the three countries entered into an agreement in 2002 aimed at lifting world prices past the US$1/kg mark. They pledged to cut output by 10% and exports by 4% over three years, starting from 2002, with Indonesia promising to cap its exports at 1.23m tonnes during the period.

Indonesia is the world!s fourth-largest producer of coffee; over 90% of its output consists of the robusta variety, while the remainder, nearly 10%, is of arabica. The main coffee-growing regions are found in the southern provinces of Sumatra (Lampung, Bengkulu, Jambi and South Sumatra) and parts of Sulawesi. Output of coffee has fallen from 29,437 tonnes in 2003 to an estimated 25,179 in 2006. Typically, 85% of output is exported. Over 90% of Indonesia!s coffee output is produced by smallholders, who own 2 ha or less each. The area planted has also fallen slightly from 57,400 ha in 2003 to 53,200m ha in 2006. Poor productivity remains a problem, and yields are commonly as low as 650 kg/ha. Around 30% of coffee trees are over 30 years old and no longer at peak productivity levels.

In 2001/02 (October-September) Indonesia overtook Ghana to become the world!s second-largest producer, behind Côte d!Ivoire. Higher prices partly accounted for the increase in Indonesian output, as farmers had the means and the incentive to increase their use of fertiliser, improve farm maintenance and use more effective methods to counter the main pest affecting the crop, the cocoa pod borer. However, in 2004 production fell by 40%, as approximately 80% of plantations were affected by pests and production has not yet shown any signs of recovery. Exports go mainly to the US (40% in 2002), Brazil (17%), Malaysia (18%) and Singapore (11%). South, South-east and Central Sulawesi account for 75% of output. The total estate area is estimated at 86,000 ha, with some 350,000 growers involved.

Some of Indonesia!s most remote Moluccan islands were once at the centre of the global spice-trading routes. Ternate, Tidore and later Ambon were the source of cloves. The Banda islands were the only producers of mace and nutmeg, and Indonesia remains the world!s largest producer of the latter. Pepper, historically a key commodity in Java and Sumatra, has again been growing in importance, with world demand rising by around 5% a year. Indonesia is the world!s second-largest pepper producer after India, with 94,300 tonnes of pepper produced in 2005, and the world!s largest white pepper producer.

The spice trade has diminished in importance in recent years, partly because of civil unrest in the Moluccas. Nutmeg production was just 23,600 tonnes in 2005, while clove production was 76,300 tonnes in 2004, most of which was

Rubber producers face harder times

Coffee yields are poor

Cocoa has become a leading export

The spice trade has diminished in importance

38 Indonesia


used by the domestic kretek (clove-spiced cigarette) manufacturing industry. Cinnamon production has been rising in recent years and stood at 88,300 tonnes in 2005. Cinnamon is primarily grown on plantations in Sumatra.

A host of other crops are of great importance to smallholders in various regions of the country. Coconuts and cashew nuts are of particular importance in parts of Sulawesi, tea is grown in Java, and North Sumatra and Central Sulawesi have acquired a reputation as producers of passion fruit. Most production is carried out by smallholders. In 2005 production of coconuts and cashew nuts stood at 3.3m tonnes and 129,800 tonnes respectively, while tea yields were 47,600 tonnes from smallholdings and 130,100 tonnes from large estates.

Indonesia is the principal exporter of wood and wood products in South-east Asia, but poor management of forest resources has pushed the sector into precipitous decline. Plywood is the main export, as a result of government regulations that first banned the export of roundwood in 1980 and then rough sawn wood in 1985. Both bans were later replaced with prohibitively high export taxes, which were lowered to 20% in early 1999 at the behest of the IMF. In October 2001 the ban on log exports was reinstated in a bid to stem losses from the smuggling of illegally felled logs. Decreasing harvest quotas have been set in recent years, reflecting the perilous state of the remaining forest resources. In 2005 exports of plywood fell to 2.2m tonnes, worth US$1.4bn, a far cry from peak exports of 5.8m tonnes in 1993, worth US$4.3bn in the prices of the day.

By law, all forest resources come under state ownership, but exploitation rights are leased to private companies under the forest utilisation right system (HPH). The number of HPH-operating forest concessions peaked at 579 in 1991, but by 2003 it had fallen to 266. Regional autonomy legislation introduced in 2001 gave district governments the right to issue small-scale concession permits. Many such permits have since been issued on land falling within existing large-scale concessions, creating great confusion in the sector and pushing harvesting rates well beyond sustainable limits.

Indonesia has suffered massive deforestation in recent years. Opaque statistics make it virtually impossible to determine exactly how much forest remains. Forest loss was estimated at 3.8m ha per year by a non-governmental organisation, Forest Watch Indonesia (FWI), in 2003. The wood-processing industry has been allowed to expand without reference to the available supply of timber, resulting in vast overcapacity. The shortfall in the official timber supply is being met by illegal logging, which has reached epidemic proportions and is now thought to account for 50-70% of output from the sector.

In recent years a voracious appetite for timber in China, which imposed a domestic log harvesting ban in 1998, has added to pressure on Indonesia!s forests. Although exports of logs are banned, a massive illegal trade takes place between Indonesia and China, and to a lesser extent between Indonesia and Malaysia. The illegal exploitation of Indonesia!s forests takes place with the full connivance of the military, the police and corrupt officials from the civilian bureaucracy.

Smallholders rely on many other cash crops

Indonesia has a large forestry industry

The industry is facing a shortage of raw materials

Indonesia 39


Fishing in Indonesia accounted for 2.2% of constant-price GDP in 2005. The value of shrimp exports alone stood at US$824m in 2004, with the total value of fish exports at around US$2bn. Despite the importance of the sector, the industry has traditionally been hampered by low productivity, owing to poor management and marketing infrastructure, and environmental degradation.

Fishing is also of great importance in the subsistence economy, and fish provide an estimated two-thirds of the animal protein in Indonesians! diets. However, there is a widening gap between supply and demand for fish. Many marine fisheries are in decline, with the productivity of coastal reef fisheries, in particular, threatened by the use of destructive fishing techniques employing explosives and cyanide. Poaching by foreign vessels has also become a serious problem in recent years, costing the government an estimated US$2bn annually in lost revenue.

Commercial effort is focused on high-value species, such as prawns and tuna. The government estimates that the total potential catch is 6.2m tonnes per year. The World Bank and the UN Food and Agriculture Organisation, however, argue that the national catch is understated and the potential yield overestimated, leaving little room for further expansion in commercial fisheries. The fisheries in western Indonesia are operating at or above maximum sustainable yields. If there is still any potential for expansion, it is to be found in the eastern region of the country.

Mining and semi-processing

Indonesia is well endowed with mineral resources. Foreign investment has been encouraged in the sector because of the capital intensity and expertise required for mineral ventures. However, many high-profile mining projects have been affected by the rise in political risk that followed decentralisation, and have become embroiled in legal and contractual disputes with district and provincial governments. Past land acquisitions have also resurfaced in numerous disputes with local communities. Contradictions between the mining law, the 2001 law on regional autonomy, and the 1999 law on forests have compounded legal uncertainty in the sector, leading to a 90% fall in exploration spending by mining companies since 1997.

Indonesia is one of the world!s leading producers of tin, accounting for around 20% of global supply. The country has extensive onshore and offshore deposits, estimated at well over 1m tonnes, on the islands of Bangka, Belitung and Singkep off the eastern coast of Sumatra. The industry is dominated by the 70% state-owned tin mining and processing company, Tambang Timah, which accounts for 80% of the country!s tin production. Official production in 2005 was 74,000 tonnes, but total annual output is thought to be in the region of 120,000 as the result of widespread illegal mining. A concerted attempt by the authorities to curtail illegal mining led to the introduction in 2006 of a stringent new export licensing scheme. The resulting contraction of supply on the international market pushed tin prices up to record levels of around US$14,500 per tonne in early 2007.

Fishing is nearing full potential

Mining faces troubled times

Indonesia is a major producer of tin

40 Indonesia


Indonesia has 500m tonnes of known reserves of bauxite. Deposits in Kalimantan remain untapped, but deposits in the Riau islands are being exploited to supply an aluminium smelter located in North Sumatra. Production has risen sharply in recent years and stood at 1.2m tonnes in 2005, up from just 808,749 tonnes in 1997.

Indonesia has been a large-scale producer and exporter of copper since 1973, when Freeport Indonesia, a wholly owned subsidiary of a US company, Freeport-McMoRan, started mining operations on the Ertsberg mountain in Papua. Following the virtual exhaustion of the Ertsberg mine, the company shifted production to the nearby Grasberg mine in January 1990 and has continued to invest substantial funds in the development of this open-cast operation. Grasberg is the world!s second-largest copper mine and employs 18,000 people. A new copper mine, operated by Newmont Nusa Tenggara, a subsidiary of a US firm, Newmont Mining, on the island of Sumbawa in West Nusa Tenggara became operational in 1999. Indonesia produced 2.6m tonnes of copper in 2005.

Indonesia became an important nickel producer in the mid-1970s, when two large deposits were developed on Sulawesi. Almost all of the country!s output of nickel is exported, with only a small proportion used for the local manufacture of stainless steel. The total production of nickel ore has decreased since the mid-1990s and stood at 1.9m tonnes in 2005.

More than 125 contracts of work to develop gold and silver deposits were signed between 1985 and 1988, leading to new discoveries and developments. In addition, large associated deposits at the Grasberg copper mine in Papua have boosted output (this is now the largest gold mine in the world). Production of gold rose from 2,391 kg in 1983 to 148,528 kg in 2001, but has since declined slightly from this peak. Production was 142,895 in 2005. Production of silver also increased sharply from 35,293 kg in 1983 to 333,561 kg in 2001, but has since declined to 326,993 kg in 2005.

Manufacturing

The manufacturing sector, which accounted for 25% of GDP in 1997, suffered in the wake of the 1997-98 financial crisis. The sector has since recovered slightly, accounting for 28% of GDP in 2006. However, manufacturers continue to be blighted by a host of problems, including labour disputes, rising production costs, security problems, illegal charges, legal uncertainty, the smuggling of cheap imports, and competition from other, lower-cost manufacturing centres, particularly China. Labour-intensive industries have suffered most, particularly those dealing in textiles, garments and leather manufacturing, footwear and wood processing, which have shed vast numbers of jobs in recent years.

Indonesia has developed a range of heavy industries. Its iron and steel industry is centred on state-owned Krakatau Steel, an integrated iron and steel producing complex at Cilegon in West Java, which began production in 1973. National steel output typically reaches 2.9m tonnes per year, of which Krakatau accounts for

Indonesia also mines bauxite, copper, nickel, gold and silver

Growth in the manufacturing sector has slowed since 1997

A range of heavy industries has been built up

Indonesia 41


2.5m tonnes. Local consumption is 3.9m tonnes annually. The local industry has been facing increasing competition from cheaper imports from India and China.

Indonesia also has an aluminium smelter, which is run by Indonesia Asahan Aluminium, a joint venture between the Japanese Overseas Economic Co-operation Fund and the Indonesian government. It has been operating in North Sumatra since 1985.

After being based almost entirely on the production of fertilisers until the mid-1980s, the petrochemical industry then began producing a large variety of products, including benzene, methanol, formic acid, paraxylene, polyethylene, polypropylene, polystyrene and purified terephthalic acid.

The cement industry had a total annual production capacity of 27.3m tonnes in 1996. Demand slumped, however, in the wake of the 1997-98 Asian financial crisis. In 1997 domestic consumption was 28m tonnes; by 1999 it had fallen to 18.4m tonnes. Initially the slack domestic market was offset by increased cement exports, but stronger economic growth in recent years has led to a recovery in local demand. Consumption in 2006 was an estimated 32.1m tonnes.

The pulp and paper industry, which initially consisted of a few state-owned companies, expanded dramatically from the mid-1980s, when it began to attract growing private investment interest. By the end of 1999 the industry consisted of 17 pulp mills and 88 paper mills, with a combined annual production capacity of 4.9m tonnes of pulp and 10.7m tonnes of paper. Further major investments are now being planned. Unfortunately the rapid development of processing mills was not accompanied by adequate investment in plantations for wood pulp. The industry has instead sourced wood from natural forest, with devastating environmental consequences. Like the rest of Indonesia!s forest-based industries, the pulp and paper industry faces problems stemming from massive excess capacity. Raw-material needs in the pulp sector run to around 25m cu metres of timber per year. Combined harvests from natural forests and plantations are incapable of meeting this demand, and the timber sourced from illegal and unsustainable sources is thought to make up much of the raw-material shortfall.

The textile and garment industry was initially developed as a heavily protected producer of import substitutes. By the early 1980s, however, as domestic demand began to become sated, the industry embarked on a major export drive. This resulted in a rapid increase in exports from negligible levels in 1980 to a value of US$9.4bn in 2006, making the industry the third-largest earner of foreign exchange after petroleum and natural gas.

Despite its importance to the economy, the sector has faced problems in recent years. Production contracts have been lost to lower-cost manufacturing centres because of rising wages and labour unrest in Indonesia, resulting in tens of thousands of job losses. The abolition of global textile export quotas in 2004 have added to the problems facing the sector. Exports from certain countries had been subject to a 30-year quota regime set out in the 1974 Multi-Fibre

The paper industry has problems with timber supply

Textile production is starting to fall

42 Indonesia


Arrangement. The expiry of this agreement means that Indonesia!s textile manufacturers must now face fierce competition from low-cost producers, particularly China. The full effects of this competition have yet to be felt, as local manufacturers have benefited from temporary US and EU restrictions on rival Chinese manufacturers. Partly as a result of these restrictions, which have encouraged retailers to place orders with Indonesian companies, exports in 2006 rose by over 9%, according to the Indonesian Textile Association. However, this is only a temporary respite, and the local industry will need to undergo a painful transition if it is to compete with rival lower-cost producers in the longer term.

Vehicle sales rose rapidly during the 1990s and reached 385,000 units in 1997, up from 206,000 in 1994. They subsequently plummeted to 58,000 units in 1998, but then rose strongly to reach 533,910 units in 2005, up by 10.5% compared with 2004. Sales have been boosted by falling consumer-credit interest rates, lower inflation and the stronger rupiah. However, rising fuel costs and interest rates led to a sharp slump in demand in 2006, with annual sales falling by 40% to 318,883 units. The automotive sector (two- and four-wheel vehicles) was deregulated and liberalised in 1999, and there are now no limits on foreign ownership, local-content requirements or incentives.

Construction

The high levels of economic growth in the two decades before 1997, and of investment growth in particular, provided a strong stimulus for the construction industry, which received a flood of orders for infrastructure, industrial, house building and other development-related projects. Like the manufacturing sector, the construction sector recorded annual growth rates well in excess of the overall rate of GDP growth. Its average annual growth rate was 11.9% in real terms between 1973 and 1983 and 7.2% between 1983 and 1993. By 1996 the construction sector!s share of constant-price GDP had risen to almost 8%. This rapid growth rate was accompanied by an equally impressive development of the sector, as domestic architects, surveyors, engineers and contractors increased in number and acquired a higher degree of professionalism. However, the sector was hit hard by the economic crisis. Construction con-tracted by 36.4% in 1998, making it the worst-performing sector in the economy. However, the sector has started to grow more strongly since 2002 and expanded by 9% in 2006, although it still accounted for only 6.1% of GDP.

Financial services

During the 1980s the banking sector was deregulated by the removal of direct controls on lending and interest rates by Bank Indonesia (BI, the central bank). To replace them, BI created an institutional framework that allowed it to exercise more indirect and market-oriented forms of monetary management. This involved the introduction of a lender-of-last-resort facility, as well as the creation of discount instruments known as Bank Indonesia Certificates (Sertifikat Bank Indonesia, SBIs) and a new set of money market securities

Vehicle production and sales have increased in recent years

Construction rose on the back of the investment boom

Restructuring the banks began in the early 1980s

Indonesia 43


(Surat Berharga Pasar Uang, SBPUs), which could be traded within the banking system to help regulate liquidity.

Further reforms in 1988 removed barriers to the establishment and expansion of privately owned domestic banks and foreign banks, setting off an explosion in the number of new banks, so that there was a total of 238 banks by October 1997. The scale of the banking sector!s problems was exposed by the onset of Indonesia!s economic crisis in the second half of 1997. Most banks had violated prudential regulations covering lending to related parties, capital adequacy ratios, loan/deposit ratios, and limits on their net open position (access to offshore sources of funds).

From July 1997 a combination of factors"the collapse of the rupiah, the downturn in the real economy, high interest rates, negative interest spreads, and rumoured and actual closures"brought the banking system to its knees. It survived only through large injections of liquidity support from the central bank. The decision to close 16 banks in November 1997, without providing the support of a deposit insurance scheme, set off a run on bank deposits across the country. The situation was only partly remedied in January 1998, by a government guarantee of domestic bank deposits and liabilities, and the establishment of the Indonesian Bank Restructuring Agency (IBRA) to rehabilitate the banking system. A total of 68 banks were closed during the restructuring of the sector, while 12 banks were taken under state control and 14 more were merged into two larger entities. Recapitalisation of the banking system is now complete, at a cost of Rp650trn (US$69m). Bonds were issued to cover the cost of the programme.

Since 2002 there have been clear signs of recovery in the banking system. IBRA successfully restructured and sold the bulk of its banking sector assets, and both foreign and domestic interest in the sales was high. The number of banks has almost halved from pre-crisis levels, to stand at 130 at end-2006. Although the banking system has grown steadily healthier, 2005 saw a marked increase in non-performing loans (NPLs), which rose in gross terms from 5.9% of total lending at the start of the year to 8.3% at year-end (the corresponding rise in net NPLs was from 1.7% to 5.1% of total lending). This deterioration stems from serious problems at the state-owned Bank Mandiri and Bank Negara Indonesia (BNI), which together account for 27% of the Indonesian banking sector. NPLs accumulated, owing to a legacy of unresolved debts and higher interest rates, as well as legal provisions that placed restrictions on the ability of state banks to restructure bad debt. These provisions have now been revised, allowing state banks to restructure bad debt according to the same procedures as their private-sector counterparts. This reform has resulted in a fall in the overall level of NPLs in the banking system, which eased to 7% in gross terms and 3.6% in net terms as of end-2006.

The Jakarta Stock Exchange (JSX) was relaunched in 1977 and began to stir after a 1988 financial reform package, which gave equal tax treatment to dividend and interest income. The JSX index rose from 83 at the start of 1988 to a new record of 682 in April 1990. The number of listed firms rose to 104 during this

The bubble bursts

The banking sector is healthier now, but problems remain

Capital markets oscillate wildly

44 Indonesia


period. These developments were accompanied by the inauguration of a secondary over-the-counter market in February 1989 and the establishment of a privately-owned stock exchange in Surabaya in June 1989. The fortunes of the capital market turned in mid-1990, and by early 1992 the JSX index had slumped to about 250. In an attempt to support its revival, the government introduced a number of measures to tighten supervisory procedures and enhance public confidence in the exchange, which was privatised in April 1992. These measures led to a recovery that, after wide fluctuations, eventually brought the index to a new peak of 725 by the end of June 1997.

The region was then plunged into an economic crisis, and despite efforts to lift investor confidence, the index went into freefall: in mid-September 1998 it stood at 292, almost 60% below its level at the end of June 1997. By end-1999 the index had recovered to 676, although markets remained extremely vulnerable to political instability. A return to relative stability during the presidency of Megawati Soekarnoputri saw the index recover. Since then the index has gone on to reach new highs, with investors drawn in by Indonesia!s future economic prospects and the reform agenda set out by the president, Susilo Bambang Yudhoyono. The index closed 2006 at 1,805, up by over 55% for the year, making Indonesia one of the best-performing markets in Asia.

Other services

The domestic trade (retail and wholesale) sector and the hotel and restaurant sector are the most important other services in the economy, together accounting for 16.9% of real GDP in 2006. Growth in these sectors in recent years has been broadly in line with the overall rate of growth in GDP.

The domestic trade sector is growing steadily, despite a number of official controls. These were intended to protect indigenous traders from competition from resident ethnic-Chinese and (to a lesser extent) ethnic-Indian and Arab business communities. Restrictions include a prohibition on foreign involve-ment in retail trade outside major urban centres, and a number of restrictions on the participation of ethnic-minority communities in rural trade. The latter regulations have been increasingly flouted in recent years, but although the government has turned a blind eye, political sensitivities have prevented the formal deregulation of the sector.

Large amounts of foreign and domestic investment funds were channelled into the hotel and tourism sector from the mid-1970s onwards. In April 1983 visa requirements were lifted for tourists from most west European countries, all ASEAN member countries and many countries in the Pacific area, including the US and Canada. Further efforts to promote tourism were launched in subsequent years, and 1993-2003 was designated Visit Indonesia Decade by the culture and tourism department.

From 1986 the growth of the industry accelerated sharply, with the number of tourists increasing by an annual average of 19.7%, from 825,000 in 1986 to an estimated 5m in 1995. In the same period tourist spending increased by 25% a

Retailing and hotels dominate services

Controls have limited domestic trade's growth

Tourism has been a leading growth industry

Indonesia 45


year, from US$590.5m to US$4.3bn. In the following two years earnings con-tinued to rise, but the number of tourist arrivals stabilised at around 5m a year.

From 1997 the tourist industry entered a difficult period, with visitor numbers falling from their 1995 peak to only 3.8m in 1998, 3.9m in 1999 and 4.2m in 2000, as a result of rising civil unrest and political instability. The industry appeared to be recovering in 2002, until in mid-October terrorist bombings in Bali, Indonesia!s principal tourist destination, killed 202 people, the majority of them Western tourists. Further terrorist attacks, outbreaks of Severe Acute Respiratory Syndrome (SARS) and avian influenza, and the negative publicity surrounding the 2004 tsunami have kept tourist numbers down, with only 4m visitors arriving in 2006, down by 2.4% on 2005.

The external sector

Trade in goods

High oil prices throughout the 1970s drew Indonesia into dependence on oil and gas exports, but the merchandise trade account remained in surplus despite a deficit in the non-oil and gas trade balance. Weaker oil and gas prices in the 1980s prompted a major drive to broaden the base of trade. The government pursued a successful diversification into non-oil and gas exports, pushing the non-oil and gas balance into surplus in 1993 for the first time in over 20 years. In 2006 the impact of this policy could still be seen: exports were worth US$100.7bn, but oil and gas accounted for only 21% of the total, despite high hydrocarbons prices.

Non-oil and gas exports rose by nearly 20% year on year in 2006. However, much of this growth was driven by high commodities prices and the competitiveness of manufactured exports is being affected by a number of interacting factors. Cuts to government subsidies are forcing up prices for fuel, water, telephone services and electricity. Occasional labour unrest and rising wage costs are also adding to costs. The lack of investment since 1997-98 means that capital equipment is becoming increasingly obsolete and unproductive. On a longer-term note, the lack of investment in education means that it is becoming increasingly difficult for Indonesia to move to higher value-added production. Foreign trade, 2006 (US$ bn) Exports fob Agricultural goods 3.4Industrial goods 64.9Minerals 11.2Oil & gas 21.2Total incl others 100.7

Tourism has suffered from fears of terrorism

Diversification away from oil and gas takes place

Rising costs undermine competitiveness

46 Indonesia


Foreign trade, 2006 (US$ bn)

Imports cif Consumer goods 4.8Raw materials 47.2Capital goods 9.0Total 61.1Balance 39.6


As a result, Indonesia has been losing global market share, even though exports have continued to show reasonable rates of growth. Trade with Indonesia!s four main markets"the EU, the US, Japan and Singapore"remains vitally important and in 2006 accounted for 53.4% of non-oil and gas export receipts. In 2006 Japan was the largest market for Indonesian goods, accounting for 15.2% of non-oil and gas exports. Recent years have also seen the emergence of China as a major trading partner, and exports to China rose by over 37% in 2006, although Indonesia has failed so far to expand its trade with China at the same speed as other export-oriented economies in South-east Asia.

Indonesia!s relationships with its major Asian markets will be deepened through ongoing discussions with both Japan and China aimed at reaching free-trade agreements (FTAs). In November 2006 Indonesia and Japan signed an economic partnership agreement that will lead to the abolition of duties on around 90% of bilateral trade between the two countries within seven years. Steps are also being taken towards an FTA between China and the Association of South-East Asian Nations (ASEAN). At an ASEAN summit held in Laos in December 2004 leaders from China and South-east Asia agreed to proceed with efforts to remove all tariffs by 2010. The China-ASEAN agreement will create the world!s largest free-trade area, with a market of over 2bn people. In addition, plans are being advanced for ASEAN-Japan and ASEAN-South Korea free-trade areas, as well as agreements with Australia and New Zealand.

Trade with regional partners should also be boosted by ongoing efforts to advance ASEAN economic integration. Agreement was reached on a "road map" towards an EU-style single market at a meeting of ASEAN finance ministers in September 2004. Under the plan, tariffs in 11 industrial sectors will be abolished by 2012, creating a single market of 530m people. Tariffs on rubber, electronics, cars, textiles, air travel, tourism, agriculture, e-commerce, fisheries, wood and healthcare are due to be abolished by ASEAN!s more developed members"Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand"by 2007. Cambodia, Myanmar, Laos and Vietnam will follow suit in 2010.

Imports have been slower to regain and surpass the levels attained before the 1997-98 economic crisis. In 1996 the import bill totalled US$42.9bn, including intermediate goods worth US$30.5bn (71% of the total) and capital goods worth US$9.7bn (22.6% of the total). Pre-crisis levels were regained in 2004, when imports rose to US$46.5bn. In 2006 imports rose further to US$61.1bn, with strong growth in all categories of imports.

China emerges as a major trading partner

Free-trade areas will deepen economic relations

Imports have yet to recover fully from the 1997 crisis

Indonesia 47


The ASEAN Free-Trade Area (AFTA)

Plans for an Association of South-East Asian Nations (ASEAN) Free-Trade Area (AFTA) were first unveiled in 1992, and a common effective preferential tariff scheme then allowed for the gradual reduction of tariffs on intra-ASEAN trade, with a full free-trade system taking effect on 1st January 2002. The AFTA has not been implemented entirely as planned, largely as a result of exemptions to tariff reductions and a clause permitting the continued use of non-tariff barriers to protect "sensitive" goods and industries. Malaysia won a two-year exemption to protect its domestic car industry, while Thailand is protecting its glass industry and the Philippines its cement industry. Singapore and Thailand have looked increasingly to bilateral agreements to liberalise their own trade relations as a result of the protectionist tendencies exhibited by other AFTA partners. Nevertheless, the average tariff on intra-ASEAN trade fell to about 3% in 2005, and a programme to establish an ASEAN harmonised tariff nomenclature has been introduced. Only six ASEAN members"Indonesia, Malaysia, the Philippines, Singapore, Thailand and Brunei"are in the vanguard of nations working towards the free-trade area; the six engaged nations account for 96% of intra-ASEAN trade. The other four ASEAN members"Vietnam, Laos, Myanmar and Cambodia"will introduce tariff reductions between 2006 and 2010.

Summary of foreign trade, selected years (US$ bn)

1985 1990 1997 2000 2005 2006Oil and gas Exports fob 12.6 11.1 11.6 14.4 19.2 21.2Imports cif -1.3 -1.9 -3.9 -6.0 -17.4 -19.0Balance 11.4 9.2 8.3 8.4 1.8 2.2Non-oil and gas Exports fob 5.9 14.6 41.8 47.8 66.3 79.5Imports cif -9.0 -19.9 -37.8 -27.5 -40.2 -42.1Balance -3.1 -5.3 4.1 20.3 26.1 37.4Total Exports fob 18.5 25.7 53.4 62.1 85.6 100.7Imports cif -10.3 -21.8 -41.7 -33.5 57.5 61.1Balance 8.2 3.8 12.4 28.6 28.1 39.6


Invisibles and the current account

A heavy dependence on imports and the persistent deficit on invisibles led to a current-account deficit throughout the 1970s, 1980s and early 1990s. Notable exceptions to this rule were the oil boom years of 1974, 1979 and 1980. The collapse in merchandise imports at the time of the 1997-98 crisis, however, served to generate a large surplus on the merchandise trade account and more than offset the deficit on the income and services accounts, enabling the current account to move into surplus in 1998, a position in which it has since remained.

Current-account deficits were the norm until 1998

48 Indonesia


Current account, 2005 (US$ m)

Merchandise exports fob 85,661

Merchandise imports fob -57,701Trade balance 22,323Invisibles -21,393Current-account balance 930

Source: IMF, International Financial Statistics.

Many of the main elements of the invisibles account run in constant deficit. A small domestic ocean-going fleet means that freight and shipping is always in the red. This has traditionally been offset in part by inflows of tourism revenue.

The deficit on the services account was an estimated US$10.8bn in 2006, up from US$9.1bn in 2005. The deficit in the oil and gas services account was driven up by increasing import demand and rising global oil prices, while the deficit in the non-oil and gas services account widened, owing to higher costs for freight and a fall in the number of foreign visitors to Indonesia.

Capital flows and foreign debt

For most of the past 30 years Indonesia has relied primarily on concessional official borrowing to meet its financing requirement (which consists of the current-account deficit plus debt repayments). This aid has been disbursed mainly through two consortia of official donors: the Inter-governmental Group on Indonesia, which was established in 1966 under the chairmanship of the Netherlands; and from 1992, after a falling out with the Dutch over East Timor, the Consultative Group for Indonesia (CGI) chaired by the World Bank. From 1992 to 2001 the CGI made annual commitments in the order of US$5bn, with the exception of the crisis year of 1998 (US$7.9bn) and to a lesser extent 1999 (US$5.9bn). The CGI pledged US$3.8bn in 2006. These funds are not always drawn down, as much of the funding is earmarked for particular projects for which the Indonesian government often fails either to provide its own share of the financing or to meet other preconditions for disbursement. In January 2007 the government announced that it would wind up the CGI forum and will henceforth address relations with donors through bilateral dialogues.

The 1997-98 Asian economic crisis pushed the capital account sharply into deficit. The large increase in official capital flows was insufficient to offset a collapse in the flow of private capital. A net private capital inflow of US$11.5bn in 1996 was transformed into a net outflow of US$13.8bn in 1998. Post-crisis measures to encourage foreign investment have been undermined by political instability and legal uncertainty, and the government has struggled to restore investor confidence. Data from Bank Indonesia (BI, the central bank) show that the divestment of foreign-held assets totalled US$2.7bn in 1999, US$4.5bn in 2000 and US$3.3bn in 2001. Net inward investment recovered to US$8.3bn in 2005 and US$7.5bn in 2006, however, confirming other indications of a slow recovery in investment. As a result, the capital- and financial-account balance strengthened to a surplus of US$345m in 2005 and US$2.5bn in 2006.

The services deficit rose in 2005 and 2006

Borrowing covers the current-account deficit

Private capital inflows begin to recover

Indonesia 49


Since 1998 policy towards foreign investment has been inconsistent. The government has been striving to increase investment, but has been unable to offer contractual and legal certainty to investors. A renewed attempt to improve the business climate was launched in early 2007, with the adoption of a new law on investment. The new law will usher in several important reforms once the necessary implementing regulations are in place. Important aspects of the new law include equal legal status for foreign and domestic investors; protection against nationalisation and expropriation; the right to repatriate earnings in foreign currency; the abolition of compulsory divestment and limited duration provisions; international arbitration for disputes; tax incentives for certain types of investment; and stronger land title rights for investment projects.

From the late 1980s Indonesia!s debt profile began to change, which increased the country!s vulnerability to the regional currency crisis when it began in mid-1997. Non-guaranteed private and short-term debt started to dominate the debt stock on a scale that was partly masked by official data, which understated the true value of these components. By the end of 1997, according to World Bank data, 42% of private debt totalling US$77.3bn was short-term, with an average maturity of about 18 months. Private debt accounted for 57% of Indonesia!s total stock of debt.

Since the crisis the composition of the debt stock has shifted back towards a greater emphasis on public long-term debt, and away from private debt. Between the end of 1999 and the end of 2003, according to data from the World Bank, private external medium- and long-term debt fell by nearly US$20bn to US$29.8bn, before rising to US$33.7bn in 2005. During this time public-sector debt remained broadly unchanged at around US$70bn (in 2005 the total stock of long-term public debt was US$72.3bn). The decline in private foreign debt was partly a result of debt repayment by non-bank corporations. It was also a by-product of the already indebted state of many of Indonesia!s companies and the fact that it would be very costly to issue new debt abroad, given the still high risk premium assigned to Indonesian assets.

Short-term debt fell by about one-third immediately after the crisis but has been creeping up steadily since 1998, when it stood at US$20.1bn, to US$24.5bn in 2005. Short-term debt made up 17.7% of total debt stocks in 2005, compared with 24.2% in 1997. The recent rise in short-term debt is not a cause for concern, however, as the bulk of short-term financing in recent years has been trade-related. According to BI, the total stock of debt at end-2006 stood at US$125bn, down from US$130bn at end-2005.

The rising cost of debt servicing in the late 1990s forced the government to restructure repayments through the Paris Club. In 2000 debt repayments of US$2.5bn were rescheduled, followed by US$5.8bn in 2001 and US$5.4bn in 2002-03. The latter agreement covered both principal and interest repayments for the first time; previous agreements had covered only principal repayments. Additional commercial debt held by the government has been restructured via the framework of the London Club of commercial creditors under the principle of equal treatment for private and public creditors. However, the government!s

The debt profile has altered

Debt restructuring is agreed

50 Indonesia


decision not to renew its financing programme with the IMF at end-2003 means that the country is no longer eligible for rescheduling by either the Paris Club or the London Club. Indonesia continued to co-operate with the IMF in a post-programme monitoring (PPM) phase until mid-2006, when it prepaid its outstanding debts of US$7bn to the Fund and drew the post-programme monitoring to a close.

Foreign reserves and the exchange rate

As a result of large capital inflows, the overall payments account generally enjoyed large surpluses until 1997, which was reflected in the accumulation of foreign-exchange reserves. This was reversed as a result of the economic crisis. International reserves (using the broad definition of gross foreign assets, or GFA) increased sharply from the late 1980s onwards, from US$5bn at end-1988 to a peak of US$28.9bn at end-June 1997. Reserves then fell sharply, owing to a massive net outflow of (mainly private) capital, reaching US$16.6bn by end-March 1998.

In May 2000, to comply with international reporting standards, the central bank began calculating foreign reserves based on the concept of International Reserve and Foreign Currency Liquidity, which provides a more accurate assessment of liquid assets at the government!s disposal. Foreign reserves calculated in accordance with the new method are lower than when using the GFA method, but have nevertheless risen steadily since mid-1999 to reach a record-high of US$42.9bn at end-2006.

After a long period from the early 1970s, during which the rupiah was pegged to the US dollar but was subject to periodic large devaluations, the government introduced a managed float aimed at maintaining the competitiveness of Indonesia!s non-oil and gas exports in the face of the inflation differential with its main international customers and competitors. The rupiah!s year-end value against the US dollar fell from Rp1,733:US$1 in 1988 to Rp2,383:US$1 in 1996, an average annual rate of depreciation of 4.1%.

The Asian currency crisis forced the government to allow the rupiah to float freely on August 14th 1997, and thereafter the currency was buffeted by a range of external and domestic developments"indebted corporations buying US dollars to cover their unhedged liabilities, the growing crisis in the banking sector, and political instability. From Rp2,450:US$1 on the eve of the crisis at end-June 1997, the rupiah hit lows of around Rp15,000:US$1 in July 1998. It strengthened to Rp8,000:US$1 by the end of 1998, but fell back to Rp11,000:US$1 by mid-2001. The rupiah has continued to experience bouts of turbulence, but during 2006 it rose by over 8.5% to Rp8,988:US$1 at the year end. The rise was driven by monthly short-term investment inflows of up to US$1bn, which were drawn into the country by the strongly performing stockmarket and relatively high interest rates.

Strong export growth helps to boost foreign reserves

The rupiah has a turbulent history

Indonesia 51


Regional overview

Membership of organisations

The Association of South-East Asian Nations (ASEAN) was established in 1967. The five original members were Indonesia, Malaysia, the Philippines, Singapore and Thailand. Brunei joined in 1984, as did Vietnam in 1995, Laos and Myanmar in 1997 and, most recently, Cambodia in 1999.

ASEAN summit meetings, which bring together the heads of government of member states, must be held at least every three years. Informal summits of heads of governments are also held. In addition, the foreign and economic affairs ministers of member countries meet annually. Joint meetings of foreign and economic affairs ministers are held before each ASEAN summit. There is also a standing committee (consisting of the members! accredited ambassadors to the host country), which usually meets every two months. There is a permanent secretariat, based in the Indonesian capital, Jakarta, and a number of committees.

The organisation started with some grand objectives, but has failed to deliver in most areas, with the exception of tariff reform. Early hopes that ASEAN could engineer a regional economic development strategy"with particular countries concentrating on particular industries"were soon dashed. In 1977 the Basic Agreement on the Establishment of ASEAN Preferential Tariffs was concluded, but members were permitted to exclude "sensitive" sectors, a let-out clause that a subsequent agreement in 1987 curtailed only slightly.

Plans for a proper ASEAN Free-Trade Area (AFTA) were unveiled in 1992, with the aim of implementing it by 2008. A common effective preferential tariff (CEPT) scheme was applied in 1993, providing for the gradual reduction of tariffs on intra-ASEAN trade in certain goods over a number of years. Again, however, member states could exclude sensitive items, limiting progress. A new AFTA programme, covering a wider range of products, was launched in 1994. During the mid-1990s the timescale for implementing the programme was steadily tightened, with the aim of reducing tariffs on most goods to below 5% by 2000. A limited AFTA, between the six earliest members of ASEAN and involving a reduction of tariffs on intra-ASEAN trade to between zero and 5%, came into operation on January 1st 2002. (Countries joining more recently have been allowed additional time.) The momentum for change has been maintained in recent years, and an ASEAN finance ministers! meeting in September 2004 agreed to abolish tariffs in 11 industrial sectors by 2012.

Before the recent acceleration in tariff reform, ASEAN!s slow progress towards AFTA had encouraged some of its members, notably Singapore and Thailand, to opt instead for bilateral trade pacts. But ASEAN!s hopes of further multilateral deals have not been extinguished. In December 2004 ASEAN and China signed a major trade deal, which aims to eliminate most tariffs on trade between ASEAN and China by 2010 (2015 for the less developed members of ASEAN). Tariffs will not go completely: countries will be able to designate a number of sectors as sensitive, and the greatest liberalisation is therefore likely to occur in areas where Chinese and ASEAN trade is complementary. In 2006 a similar

Association of South-East Asian Nations (ASEAN)

52 Indonesia


trade agreement was signed between ASEAN and South Korea, but Thailand refused to participate owing to the fact that South Korea opted to exclude rice from the deal.

The 1997-98 regional financial crisis exposed in a brutal fashion ASEAN!s failings in other areas. The organisation was unable to arrest the regional currency devaluations or alleviate the resulting economic hardship. Unfolding events in Indonesia then moved the focus of attention to the organisation!s security plans. ASEAN countries! commitment to the principle of non-interference in the internal affairs of other member states complicated the response to the crisis in Timor-Leste in 1999.

The non-interference principle has until recently also enabled the ruling military junta in Myanmar to escape strong criticism by the governments of other ASEAN countries. However, in July 2005 Myanmar gave in to international and regional pressure and agreed to forgo its turn to chair the association, thus sparing ASEAN embarrassment in its relations with the US and the EU. Moreover, since the end of 2005 ASEAN�s relations with the Burmese junta have become increasingly tense. In March 2006 a special ASEAN envoy to Myanmar was forbidden to visit the opposition leader, Aung San Suu Kyi, who is currently under house-arrest, and ASEAN leaders have become more vocal in their criticism of Myanmar!s glacial progress on political reform. Myanmar is increasingly seen as a serious impediment to ASEAN!s attempts to raise its profile and improve its credibility. In January 2007, at the most recent ASEAN summit, held in the Philippines, leaders of the association!s ten member countries endorsed recommendations for a charter that would give ASEAN the authority to enforce commitments and penalise members for misbehaviour. Member states pledged to complete a draft charter by November 2007. If this is implemented, the long-standing principle of non-interference in member countries! internal affairs will cease to apply.

APEC started life as a forum for informal discussion between six members of the Association of South-East Asian Nations (ASEAN), Brunei, Indonesia, Malaysia, the Philippines, Thailand and Singapore, and their six dialogue partners in the Pacific, Australia, Canada, Japan, New Zealand, South Korea and the US. In 1991 China, Hong Kong and Taiwan became members, followed by Mexico and Papua New Guinea in 1993 and Chile in 1994. Peru, Russia and Vietnam joined in 1998. APEC describes itself as �the primary vehicle for promoting open trade and practical economic co-operation� in the region, with the goal of advancing �Asia-Pacific economic dynamism and sense of community�.

APEC has had a permanent secretariat since 1992, and also runs four perma-nent committees"on budget and managerial issues, trade and investment, economic trends generally, and economic and technical co-operation. In addition, there are 11 working groups"on agricultural technical co-operation, energy, fisheries, human resources, industrial science and technology, marine resource co-operation, small and medium-sized enterprises, telecommuni-cations, tourism, trade promotion and transport. There is also an APEC business advisory council (ABAC), which includes up to three senior private-sector

Asia-Pacific Economic Co-operation (APEC) forum

Indonesia 53


representatives from each member country. APEC as a whole has its headquarters in Singapore, while ABAC is based in the Philippines. APEC�s main business is done at annual meetings of member states� ministers of foreign affairs and economic affairs, which are followed by informal gatherings of members� heads of state. Every other ministerial meeting is held in a South-east Asian country. The chairmanship of APEC rotates on a yearly basis.

APEC!s high point was probably reached in 1994, when members agreed a timetable for the liberalisation of trade across the region: the ambitious aim was to eliminate all trade barriers by 2020 and then to extend reciprocal concessions to non-members. Since then, APEC has appeared to lose momentum and effectiveness. Its response to the Asian regional financial crisis in 1997-98 lacked substance, and subsequent meetings provided other distractions from the trade liberalisation theme: the East Timor crisis in 1999, information technology in 2000, security issues in 2001 and North Korea!s nuclear test in 2006. The latest ministerial summit, held in the Vietnamese capital, Hanoi, in November 2006, called for a relaunch of global free-trade talks under the World Trade Organisation!s Doha round, but produced few concrete achievements.

APEC!s main problem is that it has no enforcement mechanism and cannot compel its members to take action, meaning that many of the statements issued following meetings are arguably of academic interest only. The conclusion to be drawn from recent meetings is that APEC is now more an informal talking shop than a serious regional reformer. However, the attendance of senior world leaders at its meetings illustrates that, as a forum, it remains significant.

54 Indonesia


Appendices

Sources of information

Bank Indonesia, Annual Report

Central Bureau of Statistics, Indikator Ekonomi (monthly)

Central Bureau of Statistics, Statistik Indonesia (annual)

Bank for International Settlements, International Banking and Financial Market Developments (quarterly)

IMF, International Financial Statistics (monthly)

International Institute for Strategic Studies, The Military Balance (annual)

OECD, Geographical Distribution of Financial Flows to Developing Countries (annual)

UN, Monthly Bulletin of Statistics

UN, World Investment Report (annual)

World Bank, Global Development Finance (annual)

World Bank, World Development Report (annual)

Australian National University, Bulletin of Indonesian Economic Studies (three times a year), Canberra

World Bank, Indonesia: Investing for Growth and Recovery, 2006

World Bank, East Asia Update: Managing Through a Global Downturn, 2006

Kevin O!Rourke, Reformasi, the struggle for power in post-Soeharto Indonesia, Allen & Unwin, 2002

Bank Indonesia: www.bi.go.id

Central Bureau of Statistics: www.bps.go.id

Investment Co-ordinating Board: www.bkpm.go.id

National Development Planning Agency: www.bappenas.go.id

Jakarta Stock Exchange: www.jsx.co.id

Ministry of Finance: www.depkeu.go.id

Select bibliography and websites

International statistical sources

National statistical sources

Indonesia 55


Reference tables Populationa 2002 2003 2004 2005 2006Total (m) 220.0 223.1 226.0 228.9 231.8 % change 1.4 1.4 1.3 1.3 1.3

a Mid-year estimates.

Source: US Census Bureau.

Geographical distribution of population by province, 2000 Area Population Density Growth, 1990-2000Province (sq km) ('000) (persons per sq km) (% annual av)Aceh 51,722 3,931 76 1.46North Sumatra 73,732 11,650 158 1.32

West Sumatra 42,918 4,249 99 0.63Riau 95,339 4,958 52 4.35Jambi 53,641 2,414 45 1.84

South Sumatra 93,239 6,900 74 2.39Bengkulu 19,841 1,567 79 2.97

Lampung 35,295 6,741 191 1.17Bangka Belitung 16,075 900 56 0.97Jakarta 664 8,389 12,635 0.17

West Java 34,588 35,730 1,033 2.03Central Java 32,564 31,229 959 0.94

Yogyakarta 3,186 3,122 980 0.72East Java 47,911 34,784 726 0.70

Banten 8,653 8,099 936 3.21Bali 5,637 3,151 559 1.31West Nusa Tenggara 20,147 4,009 199 1.82

East Nusa Tenggara 47,618 3,952 83 1.64West Kalimantan 149,415 4,034 27 2.29

Central Kalimantan 154,750 1,857 12 2.99South Kalimantan 43,264 2,985 69 1.45East Kalimantan 223,193 2,455 11 2.81

North Sulawesi 15,243 2,012 132 1.33Central Sulawesi 63,384 2,218 35 2.57

South Sulawesi 62,478 8,060 129 1.49South-east Sulawesi 37,943 1,821 48 3.15

Gorontalo 12,280 835 68 1.59Maluku 46,367 1,206 26 0.08North Maluku 31,402 785 25 0.48

Papua 370,156 2,221 6 3.22Total 1,892,645 206,265 109 1.49

Source: Central Bureau of Statistics, 2000 census.

56 Indonesia


Labour force (m unless otherwise indicated)

2001 2002 2003 2004 2005

Labour force 98.8 100.8 102.6 104.0 105.8

Employed labour force 90.8 91.6 92.8 93.7 94.9

Unemployed labour force 8.0 9.1 9.8 10.3 10.9

Unemployment rate 8.1 9.1 9.6 9.9 10.3

Labour force participation rate 68.6 67.8 67.8 67.6 68.0

Distribution by sector Agriculture, forestry, hunting & fishery 39.7 40.6 43.0 40.6 41.8

Mining & quarrying - 0.6 0.7 1.0 0.8

Manufacturing industry 12.1 12.1 11.5 11.1 11.7

Electricity, gas, & water - 0.2 0.2 0.2 0.2

Construction 3.8 4.3 4.1 4.5 4.4

Wholesale trade, retail trade, restaurants & hotels 17.5 17.8 17.2 19.1 18.9

Transportation, storage, & communications 4.4 4.7 4.9 5.5 5.6

Financing, insurance, real estate & business services 1.1 1.0 1.3 1.1 1.0

Community, social, & personal services 11.0 10.4 9.8 10.5 10.6

Others 1.1 - - - -

Total 90.8 91.6 92.8 93.7 94.9


Transport statistics 2001 2002 2003 2004 2005Road vehicle registrations at year-end (�000) Cars 3,262 3,403 3,885 4,464 5,494Motorcycles 15,492 17,002 19,976 23,056 28,556Trucks 1,759 1,865 2,047 2,316 2,921Buses 688 714 798 933 1,185Total 21,201 22,985 26,707 30,769 38,156Rail Passengers (m) 187.0 176.0 155.0 150 152Goods traffic (m tonnes) 18.7 17.1 16.3 17.1 17.3

Air Passengers (�000)a 14,911 16,938 21,735 28,321 30,859 Domestic 10,394 12,193 17,460 23,030 25,330 International 4,516 4,745 4,275 5,291 5,529Cargo handled (�000 tonnes)a 311 285 290 309 342 Domestic 164 142 160 171 203 International 147 143 130 138 139

a Fiscal years beginning April 1st of year indicated.


Indonesia 57


National energy statistics 2002 2003 2004 2005 2006

Crude oil (m barrels) 351.9 339.1 354.4 341.8 n/a

Natural gas ('000 tonnes) 2,279 2,143 3,026 2,893 n/a

Coal (m tonnes) 105.5 113.5 128.5 149.7 n/a

State electricity company (PLN) capacity (mw) 21,113 21,206 21,459 22,515 22,531a

PLN distribution ('000 customers) 88,412 90,440 99,827 107,032 108,099a

State gas company ('000 cu m) 2,458 2,849 3,678 3,775 3,872a

a Estimates.

Source: Statistics Indonesia.

Central government budget summary (Rp bn)

2001 2002 2003 2004 2005

Domestic revenue incl grants 299,661 298,528 341,396 400,590 495,446

Total expenditure 341,563 315,634 376,505 423,841 509,419

Current expenditure 218,923 180,016 186,944 232,817 322,049

Development spending 41,585 37,325 69,247 60,979 36,854a

Regional expenditure 81,054 98,204 120,314 130,045 150,516

Overall balance -41,902 -17,106 -35,109 -23,251 -13,973

Financing 41,902 25,247 32,662 20,363 18,989

Domestic 31,445 25,164 32,115 48,853 30,266

Foreign, net 10,457 83 548 -28,490 -11,277

Programme loans 6,416 7,170 1,792 5,059 12,265

Project loans 19,926 11,717 18,568 12,942 13,552

Amortisation -15,885 -18,804 -19,812 -46,491 -37,094

a From 2005 development spending includes social spending.

Source: Ministry of Finance.

Money supply (Rp bn unless otherwise indicated; end-period)

2002 2003 2004 2005 2006

Money (M1) incl others 182,647 213,681 245,675 270,825 346,971

% change, year on year 7.4 17.0 15.0 10.2 28.1

Quasi-money 694,951 733,579 785,532 929,658 1,032,080

Money (M2) 877,598 947,260 1,031,207 1,200,483 1,379,051


Source: IMF International Financial Statistics.

Interest rates (%; period averages unless otherwise indicated)

2002 2003 2004 2005 2006

Lending interest rate (%) 18.9 16.9 14.1 14.1 16.0

Deposit interest rate (%) 15.5 10.6 6.4 8.1 11.4

Money-market interest rate (%) 13.5 7.8 5.4 6.8 9.2

Source: Bank Indonesia, Indonesian Financial Statistics.

58 Indonesia


Gross domestic product (market prices)

2002 2003 2004 2005 2006

Total (US$ bn) At current prices 200.1 234.8 254.3 287.0 364.5

Total (Rp bn) At current prices 1,863,275 2,013,675 2,273,142 2,785,000 3,338,200

At constant (2000) prices 1,506,124 1,577,171 1,656,826 1,750,700 1,846,700


Per head (Rp '000) At current prices 8,469 9,027 10,058 12,167 14,400

At constant (2000) prices 6,845 7,070 7,331 7,648 7,966


Sources: Statistics Indonesia (BPS).

Nominal gross domestic product by expenditure (Rp bn at current prices where series are indicated; otherwise % of total)

2002 2003 2004 2005 2006

Private consumption 1,231,965 1,372,078 1,532,888 1,785,600 2,092,700

66.1 68.1 67.4 64.1 62.7

Government consumption 132,219 163,701 191,056 225,000 288,100

7.1 8.1 8.4 8.1 8.6

Gross fixed investment 353,967 392,789 492,850 657,600 800,100

19.0 19.5 21.7 23.6 24.0

Stockbuilding 35,980 122,682 34,515 27,700 19,600

1.9 6.1 1.5 1.0 0.6

Exports of goods & services 595,514 613,721 729,321 936,000 1,030,800

32.0 30.5 32.1 33.6 30.9

Imports of goods & services 480,815 465,941 623,525 816,400 870,100

25.8 23.1 27.4 29.3 26.1

GDP 1,863,275 2,013,675 2,273,142 2,785,000 3,338,200


Indonesia 59


Real gross domestic product by expenditure (Rp bn at constant 2000 prices where series are indicated; otherwise % change year on year)

2002 2003 2004 2005 2006

Private consumption 920,750 956,593 1,004,109 1,043,800 1,076,900

3.8 3.9 5.0 4.0 3.2

Government consumption 110,334 121,404 126,249 134,600 147,600

13.0 10.0 4.0 6.6 9.7

Gross fixed investment 307,585 309,431 354,561 393,200 404,600

4.7 0.6 14.6 10.9 2.9

Stockbuilding 13,085 45,997 23,502 18,700 13,100

-2.0a 2.2a -1.4 a -0.3a -0.3a

Exports of goods & services 566,188 599,516 680,466 792,000 864,500

-1.2 5.9 13.5 16.4 9.2

Imports of goods & services 422,271 428,875 544,963 635,900 684,100

-3.7 1.6 27.1 16.7 7.6

GDP 1,506,124 1,577,171 1,656,826 1,750,700 1,846,700

4.4 4.7 5.1 5.7 5.5

a Change as a percentage of GDP in the previous year.


Prices and earnings (% change, year on year)

2002 2003 2004 2005 2006

Consumer prices (av) 11.9 6.8 6.1 10.5 13.1

Average nominal wages -87.6 8.8 18.0 9.0 6.1

Average real wages 12.2 1.9 11.2 -1.3 -6.2

Unit labour costs 33.8 14.5 9.8 -2.4 10.7


60 Indonesia


Agricultural production (�000 tonnes unless otherwise indicated)

2003 2004 2005 2006a

Food crops Paddy 52,138 54,088 54,151 54,402Cassava 18,524 19,424 19,321 19,927Maize 10,886 11,225 12,524 11,611Sweet potato 1,991 1,902 1,857 1,852Soybeans 672 723 808 749Peanuts 786 837 836 838Cash crops Palm oil 6,924 8,479 10,191 10,869Palm kernel 1,529 1,862 2,156 2,316Cane sugar 1,992 2,052 2,242 2,267Dry rubber 396 404 432 451Cocoa 56.6 54.9 55.1 55.5Coffee 29.4 29.2 24.8 25.2Tea 128 126 128 114Tobacco 5.2 2.7 4.0 4.0Livestock slaughterings ('000) Cattle 1,283 1,352 1,303 n/aPigs 929 991 979 n/aGoats 574 591 606 n/a

Fish

Marine fisheries 4,320 4,408 n/a n/aOpen water 331 297 n/a n/a

Forestry Logs ('000 cu metres) 9,432 7,582 n/a n/a

a Estimates.


Minerals production (�000 tonnes unless otherwise indicated)

2001 2002 2003 2004 2005a

Coal 71,073 105,539 113,526 128,480 149,665

Nickel ore 2,474 2,121 2,420 2,025 1,861

Copper 2,418 2,851 2,306 1,803 2,646

Bauxite 1,237 1,283 1,263 1,332 1,182

Silver ('000 kg) 334 282 272 255 327

Gold ('000 kg) 149 140 138 87 143

Tin 69 88 74 73 74

a Estimates.


Indonesia 61


Manufacturing production (2000=100)

2001 2002 2003 2004 2005Textiles 76.44 92.29 102.32 96.03 83.41Food & beverages 112.54 130.02 164.14 172.13 208.17

Tobacco 121.17 84.49 81.23 103.60 117.10Furniture 95.69 136.43 160.38 188.22 214.14Wood products 94.55 97.93 107.28 107.68 109.78

Paper & paper products 116.87 159.66 128.47 125.48 127.56Chemicals 130.65 146.19 160.28 175.60 180.73

Rubber & plastic products 85.43 119.06 112.72 117.09 128.38Machinery & equipment 91.76 167.05 229.78 296.51 201.49Motor vehicles & trailers 111.71 79.78 100.82 121.62 165.50

Radio, television & communications equipment 63.98 81.45 90.67 103.99 133.13


Main composition of trade (US$ m; fob-cif)

2002 2003 2004 2005 2006Export fob Crude petroleum & products 6,550 7,349 7,620 9,523 10,821Liquefied natural gas (LNG) 5,578 6,477 7,750 8,734 9,953Textiles & garments 6,963 7,103 7,323 8,360 9,377Wood & products 3,252 3,162 2,778 3,225 2,778Total exports incl others 57,158 61,059 71,585 85,661 100,576Imports cif Intermediate goods 24,228 25,496 36,204 44,132 47,200Capital goods 4,411 4,192 6,534 8,288 9,000Consumer goods 2,651 2,863 3,787 4,621 4,800Total imports incl others 31,289 32,551 46,524 57,701 61,100

Source: Statistics Indonesia (BPS)

Main trading partners (% of total)

2001 2002 2003 2004 2005

Exports fob to: Japan 23.1 21.1 22.3 22.3 22.0

US 13.8 13.2 12.1 12.3 13.7

China 3.9 5.1 6.2 6.4 8.9

Singapore 9.5 9.4 8.8 8.4 8.8

Imports cif from: Japan 15.1 14.1 13.0 13.1 17.8

China 6.0 7.8 9.1 8.8 16.0

Singapore 10.2 13.1 12.8 13.1 12.6

Thailand 3.2 3.8 5.2 6.0 7.6


62 Indonesia


Balance of payments, IMF series (US$ m)

2001 2002 2003 2004 2005

Goods: exports fob 57,364 59,166 64,110 70,766 86,179

Goods: imports fob -34,669 -35,653 -39,546 -50,615 -63,856

Trade balance 22,696 23,513 24,564 20,152 22,323

Services: credit 5,501 6,663 5,293 12,046 12,926

Services: debit -15,880 -17,044 -17,401 -20,857 -23,728

Income: credit 2,004 1,318 1,054 1,996 2,333

Income: debit -8,940 -8,365 -7,271 -12,913 -14,182

Current transfers: credit 1,520 2,211 2,053 2,433 2,457

Current transfers: debit 0 -470 -184 -1,295 -1,199

Current-account balance 6,900 7,824 8,107 1,562 930

Direct investment in Indonesia -2,977 145 -597 1,896 5,259

Direct investment abroad 0 0 0 -3,408 -3,065

Inward portfolio investment (incl bonds) -245 773 2,252 4,056 5,315

Outward portfolio investment 0 0 0 353 -1,078

Other investment assets -125 -500 -5 -717 -4,472

Other investment liabilities -4,271 -1,970 -2,599 -4,550 -6,809

Financial balance -7,618 -1,552 -949 -2,370 -4,850

Net errors & omissions 701 -1,763 -3,510 -1,393 -2,073

Overall balance -15 4,958 3,647 -2,199 -5,659

Financing (� indicates inflow) Movement of reserves 1,250 -4,030 -4,205 -51 1,725

Use of IMF credit & loans 394 1,426 1,928 0 0


Indonesia 63


External debt, World Bank series (US$ m unless otherwise indicated; debt stocks as at year-end)

2001 2002 2003 2004 2005

Public medium- & long-term 68,504 71,145 74,024 71,991 72,335

Private medium- & long-term 34,405 30,026 29,754 33,546 33,658

Total medium- & long-term debt 102,909 101,172 103,777 105,537 105,993

Official creditors 52,621 57,364 61,287 60,458 59,032

Bilateral 33,250 37,924 41,520 41,285 40,518

Multilateral 19,372 19,440 19,767 19,173 18,514

Private creditors 50,288 43,808 42,491 45,079 46,962

Short-term debt 21,805 22,806 22,903 24,500 24,500

Interest arrears 5,632 6,406 7,403 7,400 7,400

Use of IMF credit 9,113 8,862 10,276 9,686 7,807

Total external debt 133,828 132,839 136,956 139,723 138,300

Principal repayments 9,603 12,892 14,264 15,603 13,904

Interest payments 5,872 3,981 4,220 4,843 4,141

Short-term debt 864 600 638 652 652

Total debt service 15,475 16,874 18,484 20,447 18,045

Ratios (%) Total external debt/GDP 81.5 66.4 58.3 54.9 48.2

Debt-service ratio, paida 23.5 24.7 25.7 23.6 17.4

Note. Long-term debt is defined as having original maturity of more than one year.

a Debt service as a percentage of earnings from exports of goods and services.

Source: World Bank, Global Development Finance.

Foreign reserves (US$ m; end-period)

2002 2003 2004 2005 2006

Total reserves incl gold 32,048 36,253 36,304 34,579 42,893

Total international reserves excl gold 30,971 34,962 34,953 32,989 40,934

Gold, national valuation 1,077 1,291 1,351 1,590 1,959


Exchange rates (Rp per unit of currency unless otherwise indicated; annual averages)

2002 2003 2004 2005 2006

US$ 9,311 8,577 7,855 9,705 9,159

£ 13,955 14,004 14,382 17,645 16,853

� 8,798 9,699 9,766 12,090 11,501

Rmb 1,125 1,036 949 1,184 1,149

Bt 216.7 206.8 195.3 241.3 241.8

¥ 74.3 74.0 72.6 88.1 78.8

Sources: Bank Indonesia, Indonesian Financial Statistics IMF, International Financial Statistics.

Editors: Daniel Martin (editor); Gerard Walsh (consulting editor) Editorial closing date: June 15th 2007 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected]

indonesia - international university of japan filecountry profile 2007 indonesia this country...

Documents