Indonesian memorandum of economic and financial policies
Indonesian memorandum of economic and financial policies
The following is the full text of Indonesia's 50-point
Memorandum on Economic and Financial Policies attached to the
letter of intent signed by President Soeharto Thursday in
Jakarta.
I. BACKGROUND
1. For the past several decades, prudent macroeconomic policies
and continuing structural reforms have kept Indonesia on a path
of rapid economic development. Since the 1970s, economic growth
has averaged 7 percent per annum, raising GDP per capita toward
the level of middle income countries, while dramatically lowering
the incidence of poverty. The economic structure has become
diversified, as dependency on the oil sector has declined and an
export-oriented manufacturing base has emerged, led by a dynamic
private sector and fueled by high domestic savings and large
inflows of foreign direct investment. Meanwhile, macroeconomic
balance has been maintained: the budget has been balanced;
inflation has been contained at relatively low levels; current
account deficits have been kept moderate; and international
reserves have remained at comfortable levels.
2. Despite this strong macroeconomic performance, a number of
underlying weaknesses have made the country vulnerable to adverse
external shocks. Structural rigidities arising from regulations
in domestic trade and import monopolies have impeded economic
efficiency and competitiveness. At the same time, the relative
stability of the rupiah during most of the 1990s, together with
high rates of return on domestic investment, both encouraged and
facilitated high levels of overseas borrowing, a significant
portion of which has been private short-term debt that has been
unhedged. By end-December 1997, Indonesia's external debt stood
at US$140 billion (about two-third of GDP), of which $20 billion
was short term, while its debt service has remained close to one-
third of exports of goods and services. Also, the rapid expansion
of the financial system since the late 1980s has left a number of
banks with significant amounts of nonperforming loans, straining
their liquidity and, in a number of cases, undermining their
financial viability.
3. In the wake of the recent currency turmoil in the region, the
exchange rate has depreciated to alarming levels. From mid-July
last year to early January this year, the cumulative depreciation
of the rupiah reached 70 percent, with over half of this decline
occurring since the end of November, while the fall in the
Jakarta stock exchange index reached 50 percent, both the largest
declines in the region. The enormous depreciation of the rupiah
did not seem to stem from macroeconomic imbalances, which
remained quite modest. Instead, the large depreciation reflected
a severe loss of confidence in the currency, the financial
sector, and the overall economy.
4. The plummeting of the rupiah has led to very large increases
in the rupiah debt service costs of banks and corporations that
had borrowed -- largely without hedging -- from abroad. Moreover,
since the currency depreciation has engendered a substantial rise
in domestic interest rates, the burden of paying for, and
collecting, domestic currency loans has also increased, further
straining the position of corporations and financial
institutions, particularly those that were already weak. A major
concern for the government is that the process has become self-
reinforcing: growing strains on firms have amplified investor
uncertainty and encouraged capital flight, thereby intensifying
pressures on the exchange rate and domestic interest rates.
5. From the outset of the currency crisis, the government has
taken strong corrective action. To discourage speculative
attacks, the exchange rate band was widened in July and, in
August, in the face of continued pressure on the currency, the
rupiah was allowed to float. This policy was backed by a
significant tightening of liquidity conditions and an
announcement that the budget surplus would be preserved by
postponing major infrastructure projects, cutting low priority
development programs, and extending the coverage of the luxury
sales tax. At the same time, import tariffs on over 150 items
(mainly raw materials and other intermediate goods) were reduced
effective mid-September, while the 49 percent limit on foreign
holdings of listed shares was abolished. Further trade
liberalization measures, including removing monopoly restrictions
on agricultural imports were announced in November last year.
These actions, however, were not sufficient to restore confidence
in the rupiah and the economy.
II. THE POLICY FRAMEWORK
6. In November, in the context of an IMF-supported program, the
government put in place a comprehensive policy package to restore
confidence and arrest the decline of the rupiah. Fiscal policy
was formulated to preserve a budget surplus of about 1 percent of
GDP while monetary policy aimed at containing inflation and
supporting the exchange rate. These policies were to provide the
supportive macroeconomic framework for the continuing efforts to
restructure the financial sector and accelerate structural
reforms.
7. However, following a short-lived strengthening, the rupiah
plummeted owing to a combination of contagion from currency
turmoil in the region, political developments and other
uncertainties. It is now clear that the original macroeconomic
targets cannot be realized. Under current volatile conditions, it
is difficult to set precise macroeconomic targets. Nevertheless
the program is designed to avoid a decline in output, while
limiting inflation to about 20 percent, which, although high by
Indonesian standards, is unavoidable given the substantial
depreciation of the rupiah. At the same time, the external
current account balance is expected to move from a deficit in
1997/1998 to a surplus in 1998/1999.
A. Macroeconomic Policies
Fiscal Policy
8. The government is fully committed to maintaining a sound
fiscal policy. However, with the sharp depreciation of the rupiah
and the deterioration in the economy, it is no longer feasible to
aim at a surplus of 1 percent of GDP in 1998/1999. The budget has
therefore been framed to strike an appropriate balance between
preventing undue deterioration of the fiscal position and
avoiding an excessive fiscal contraction. Accordingly, the
government is determined to follow its long-standing policy of a
balanced budget (in the Indonesian presentation), which avoids
any recourse to domestic financing. The corresponding deficit in
the IMF presentation is about 1 percent of GDP. To realize this
objective, the government has strengthened the budget introduced
on Jan. 6 by adopting new measures.
9. To reduce economic distortions, and strengthen the fiscal
position, the government intends to adjust administered prices
with the aim of gradually eliminating subsidies on fuel and
electricity. As the price increases necessary to eliminate these
subsidies are very large owing to the depreciation, it is not
feasible to bring domestic prices to the level of international
prices abruptly. The government will therefore aim to eliminate
these subsidies gradually over the course of the program,
starting with the sizable initial adjustment in April 1, 1998 in
fuel and electricity prices, except for prices of kerosene and
diesel fuel, where increases will be kept to a minimum so as to
protect the poor.
10. On the revenue side, the government has already announced
increases in excises on alcohol and tobacco, which will
effectively raise revenue from these items by 80 percent and 10
percent, respectively. These excises will be increased further on
July 1, 1998 to reflect exchange rate and price developments. In
addition, effective April 1, 1998, the government will remove all
VAT exemptions (apart from those on capital goods of those
explicitly mandated by law); these include, inter alia,
electricity for private companies, taxis, soybean food for
cattle, sugar, personal goods, medical equipment, and other
machinery and capital equipment. All VAT exemption arrangements
will be reviewed regularly. With regard to other taxes, a 5
percent local sales tax on gasoline will be introduced on April
1, 1998 and the number of goods subject to the luxury sales tax
will be increased. The government will also shortly increase the
proportion on the market value of land and buildings assessable
for tax to 40 percent for plantations and forestry property.
11. In order to improve tax administration and the structure of
the tax system, the government has introduced a single taxpayer
registration number which will come into effect on April 1, 1998.
Further planned improvements, in line with recommendations of the
Fiscal Affairs Department of the IMF, to increase non-oil tax
revenue, include: (i) raising the annual audit coverage; (ii)
developing improved VAT audit programs to target large potential
taxpayers; and (iii) increasing the recovery of tax arrears. To
accelerate progress in this area, the government intends to
request further technical assistance from the Fund.
12. To ensure the quality and durability of the fiscal reform,
the government will move to a comprehensive and transparent
system to report on the public sector financial position,
particularly including quasi-fiscal operations. Accordingly, the
government has decided to accelerate provisions under the Nontax
Revenue Law of May 1997 which require all off-budget funds to be
incorporated in the budget within five years. The accounts of the
two large off-budget accounts, the Investment Fund and the
Reforestation Fund, will be incorporated in the central
government budget at the beginning of the 1998/1999 fiscal year.
In the specific case of the Reforestation Fund, the government
will ensure that the funds are used exclusively for their
intended purpose of financing reforestation programs, which
include those outside the concessional forest areas, development
of industrial forestry areas, reforestation of unproductive land,
and other reforestation programs.
13. In recognition of the serious financial crisis facing
Indonesia, the government has canceled 12 major infrastructure
projects that had been reinstated earlier, including the Tanjung
Jati-C power plant. The Government has also decided to
discontinue immediately any special tax, customs, or credit
privileges granted to the National Car. In any event, the
government will implement ahead of schedule the ruling of the WTO
dispute panel. Moreover, consistent with Indonesia's commitment
to the WTO, the local content program for motor vehicles, which
gives preferential tariff rates to vehicle manufacturers using a
high percentage of local parts, will be phased out by 2000. It
has also decided to discontinue immediately any budgetary and
extrabudgetary support and credit privileges granted to IPTN
projects.
Monetary and Exchange Rate Policy
14. Since the crisis began, Bank Indonesia's monetary strategy
has been to support the rupiah exchange rate, and limit any
increase in inflation, by maintaining a firm monetary stance. The
execution of his policy, however, has been hampered by problems
in the banking system. Following the closure of 16 insolvent
banks in November last year, customers concerned about the safety
of private banks have been shifting sizable amounts of deposits
to state and foreign bank, while some have been withdrawing funds
from the banking system entirely.
15. These movements in deposits have greatly complicated the task
of monetary policy, because they have led to a bifurcation of the
banking system. By mid-November, a large number of banks were
facing growing liquidity shortages, and were unable to obtain
sufficient funds in the interbank market to cover this gap, even
after paying interest rates ranging up to 75 percent. At the same
time, another smaller group of banks were becoming increasingly
liquid, and were trading among themselves at a relatively low
JIBOR (Jakarta Interbank Offer Rate) of about 15 percent. As this
segmentation continued to increase, while the stress on the
banking system intensified, Bank Indonesia was compelled to act.
It provided banks in distress with liquidity support, while
withdrawing funds from banks with excess liquidity, thereby
raising JIBOR to over 30 percent in early December, where it has
since remained.
16. Nevertheless, despite this increase in interest rates -- to
levels higher than in any other country in the region -- the
problems of the rupiah have only intensified. From early December
to early January, the exchange rate lost a further 53 percent of
its external value, falling from around Rp 3,700 per U.S. dollar
to around Rp 8,000 per U.S. dollar. Part of the reason was that
the rupiah was affected by the financial turmoil in other
neighboring countries. Another factor was that markets became
increasingly concerned about the deterioration in Indonesia's
economic situation, which has weakened the financial health of
the banking system and the corporate sector. Most of all,
however, markets were concerned that the program originally
designed in November was no longer sufficient to overcome the
country's economic predicament.
17. With the overall policy package that has recently been
adopted, and set out in this Memorandum, the government is now
convinced that confidence in the economic direction of the
country will be speedily restored. And as this occurs, the
exchange rate of the rupiah will finally stabilize. However,
during the transitional period, in which confidence is taking
hold, lingering concerns about exchange rate depreciation are
likely to keep market interest rates at high levels. Bank
Indonesia recognizes that, in these circumstances, it will need
to keep its own interest rates high, as well. Accordingly, Bank
Indonesia is raising interest rates on SBI (central bank)
certificates across the entire spectrum of maturities, from
overnight to one year, thereby bringing them in line with
conditions prevailing in the money market -- and sending a clear
message to financial markets that it will maintain a firm
monetary stance for as long as proves necessary. At the same
time, Bank Indonesia is also providing full autonomy to state
banks to adjust rates on credit and deposits liabilities, so that
their rates could also reflect developments in money and credit
markets.
18. This tight monetary stance will inevitably mean that, at
least for the time being, the amount of credit available for
lending to the corporate sector will remain constrained and the
cost of credit will remain very high. Such a situation will place
a particular burden on smaller enterprises, which rely on bank
credit for their sole source of financing. To alleviate this
burden, the government has introduced a temporary program under
which credit will be provided to small-scale enterprises through
the state banks at subsidized interest rates. The cost of the
subsidy will be borne not by the state banks, but rather by the
central government budget. A facility will also be established to
extend credit to exporters at commercial terms. Eventually,
though, these arrangements should prove redundant, since once
confidence is fully restored and the exchange rate stability is
regained, then funds should flow back into the banking system and
the overall policy stance can be relaxed gradually, thereby
providing greater room for banks to expand credit and lower their
interest rates -- for all firms.
19. Bank Indonesia's financial program has been formulated in the
context of extremely uncertain financial conditions, including
with regard to the demand for monetary aggregates. Over the
course of 1997, the growth of broader monetary aggregates, slowed
considerably, with M2 growth falling from year-on-year rates 25
1/2 percent in June to 23 percent by November. At the same time,
the money multiplier has fallen sharply, partly because there has
been a market increase in the demand for currency, as concerns
grew over the scale of banking sector difficulties, but also
because financial intermediation has declined, as banks become
more reluctant to lend. Consequently, even though base money
growth exceeded the program objective, broad money was well
within the December target.
20. Bank Indonesia has established, in consultation with the
Fund, a financial program for 1998, to ensure that monetary
policy continues to operate within a well-defined framework, with
a clear inflation objective. This program aims to contain
inflation to less than 20 percent, implying that policy will
ensure that there is only a limited pass through of the very
substantial depreciation onto the prices of imports, and only a
muted impact of the drought on food prices. To achieve this
ambitious objective, Bank Indonesia plans to limit the growth of
broad money to 16 percent in 1998. As in 1997, broad money growth
targets will be attained by controlling base money, rather than
by relying on direct quantitative lending targets.
21. This monetary strategy will be complemented by judicious
foreign exchange intervention to stabilize and support the
exchange rate. The scale of this intervention will be determined
in close consultation with IMF staff, and will also be subject to
Bank Indonesia maintaining net international reserves above the
monthly and quarterly floors specified in the program. As in our
previous Memorandum on Economic and Financial Policies, any
sterilization of exchange market intervention will be strictly
limited so as to ensure that monetary conditions become firmer as
the scale of intervention increases.
22. Bank Indonesia will immediately be given autonomy in
formulating and implementing monetary policy. To ensure that the
central bank remains accountable, the inflation objective will
continue to be decided by the government as a whole, but the
policies for achieving this objective, such as changes in
official interest rates, will be determined solely by the central
bank. To institutionalize the autonomy of the central bank, a
draft law will be submitted to Parliament by the end of 1998,
which will also include changes in the composition and mandate of
the Monetary Board.
B. Financial Sector Restructuring
Bank restructuring program
23. The government has already taken decisive action to implement
a comprehensive program of bank restructuring aimed at restoring
the soundness of the banking system. On Nov. 1, 1997, sixteen
insolvent banks were closed. The bank closures made it clear to
the market that owners would lose their stake in banks that
become unviable. A number of other banks, including regional
development banks, have been placed under intensive supervision
by the central bank. Rehabilitation plans for some of these banks
have been approved by the central bank and are being implemented,
while others are still under preparation.
24. However, the continued depreciation of the rupiah, the
slowdown in growth, and high interest rates since then have led
to a market deterioration of the financial condition of the
remaining banks. This deterioration has been exacerbated by
deposit runs and capital flight forcing many banks to
increasingly resort to central bank liquidity support. The large
depreciation of the rupiah in recent weeks has raised the
concerns that these problems will only intensify.
25. In these circumstances, the government believes that re-
establishing confidence in the ability of the banking system to
meet its commitments and play its intermediation role is of
paramount importance. Therefore, Bank Indonesia is working
closely with the AsDB, IMF, and World Bank staff to establish and
expeditiously implement uniform, transparent and equitable rules
for resolving liquidity and solvency problems, of private banks.
These measures will be announced shortly. The central bank will
provide liquidity support to banks subject to increasing
conditions, while ensuring that liquidity support extended to
banks will be consistent with the program's monetary growth
objectives.
26. With technical assistance from the World Bank, the government
has also taken steps to resolve the problems of the state banks
and ensure their safety and soundness. The aim of this program is
to improve their efficiency and subsequently privatize them.
Toward this objective, the government announced in December 1997
that BTN will become a subsidiary of BNI and that four state
banks, Bapindo, Bank Bumi Daya, BDN and Bank Exim, will be
merged. The government will ensure that the merger process will
be used to downsize the operations of the operations of the
merging banks, sell redundant facilities and bank branches,
reduce excessive manpower, economize on automated systems,
maximize benefits from complementary strengths, and prepare the
institutions for privatization. The government will ensure that,
until privatization, the state banks perform according to
criteria detailed in performance contracts, prepared by the
Ministry of Finance (Directorate General for State Enterprises)
with assistance from the World Bank, by end-March 1998. These
contracts will spell out the objectives of the management of each
institution and form the basis for assessing performance.
27. In support of the ultimate goal of full privatization of all
state banks, the government will introduce legislation by end-
June 1998 to amend the Banking law in order to remove the limit
on private ownership. The new bank formed from the merger of the
four state banks will be staffed by new managing directors. This
new management will be in place by end-February 1998 and will
formulate and implement a plan for interim operations of the four
merging banks including a timetable for the final merger. Foreign
strategic partners will be sought for the merged bank to assist
in attracting other private sector participation and for eventual
privatization. The timetable for privatization for all the state
banks will be determined in consultation with the IMF and the
World Bank.
28. As preparation for the mergers and acquisition process, as
well as for privatization, all state banks (including those that
will not be merged) will conduct portfolio, systems, and
financial reviews to internationally acceptable standards using
teams from internationally recognized audit firms. These reviews
will be initiated by end-February 1998 and completed by end-June
1998. Subsequent reviews will be conducted annually. The
portfolio, systems, and financial reviews will serve to appraise
the value of the assets and establish a basis for segregation of
good and bad assets, according to uniform criteria and
procedures. In addition, a financial plan for funding of bad
debts of the state banks will be prepared with the assistance of
the World Bank by end-July 1998. A new asset resolution entity
will be established by end-March 1998, and made fully operational
by end-July 1998. This entity will receive the bad debts of state
banks and will concentrate solely on debt recovery within a
defined time schedule.
Strengthening the legal and supervisory framework for banking
29. The government is firmly committed to improving the
supervision of the banking system. Enforcement of prudential
regulation has been strengthened through establishment of a
graduated system of penalties for noncompliance, culminating in
the withdrawal of banking license. Capital adequacy rules are
being enforced within the context of the bank restructuring
strategy, and in the case of the non-foreign exchange banks,
minimum capital requirements will be increased gradually to put
them on par with the foreign exchange banks. New loans
classification and provisioning guidelines have been prepared and
loan loss provisions will be made fully tax-deductible by end-
March 1998. The reporting and monitoring procedures for foreign
exchange exposure of banks have been upgraded and the limits
strictly enforced. The central bank's capacity for risk-based
supervision will be further strengthened with technical
assistance from the IMF and the World Bank. Beginning in March
1998, internationally-recognized specialists are to provide
active support in on- and off-site supervision. Moreover, to
eliminate the conflict of interest inherent in central bank
ownership of banks, Bank Indonesia has established a program for
divestiture of its interests in private banks, and has already
made substantial progress towards this goal.
30. To further strengthen the policy and institutional
infrastructure for banking, the government has taken steps to:
(a) revise the legal framework for banking operations, after a
thorough review of central bank and banking laws as well the
company law and liquidation regulations, which will be completed
by end-September, 1998. Areas of focus will include, bankruptcy,
banking disclosure, taking and realizing collateral, and
regulations on financial instruments. Action plans to improve the
legal framework will be prepared by the end of 1998 with the help
of the IMF and the World Bank.
(b) improve transparency and disclosure in banking. To this
end, the government will immediately require all banks to publish
audited financial statements annually. Bank Indonesia will also
review the adequacy of data provided in banks' condensed biannual
balance sheets with a view to improving the dissemination of
information on the financial condition of individual banks. The
government will also require banks to regularly publish more
comprehensive data on their operations, after a transition period
that is expected to be less than two years. Banks wishing to
publish such data prior to the end of the transition period would
be free to do so.
(c) level the playing field for foreign investors in banking. As
part of its WTO negotiations for liberalizing trade in financial
services, the government has decided to: lift restrictions on
branching of foreign banks by February 1998; in addition, it will
submit to the Parliament a draft law to eliminate restrictions on
foreign investment in listed banks by June 1998.
(d) eliminate all restrictions on bank lending, other than those
required for prudential reasons, or those to support co-
operatives and small-scale enterprises (the KUK scheme).
C. Structural Reforms
31. In November, the government set out an ambitious strategy of
structural reform, aimed at bringing the economy back to a path
of rapid growth, by transforming the 'high-cost economy" into one
which would be more open, competitive, and efficient. To achieve
this transformation, the strategy called for foreign trade and
investment to be further liberalized, domestic activities to be
further deregulated, and the privatization program accelerated.
At the same time, it envisaged that measures would continue to be
taken to alleviate poverty.
32. The government has already made considerable progress toward
the strategy's objectives. In November, a major step was taken
toward opening up the economy and increasing competition, when
BULOG's import monopoly over wheat and wheat flour, soybeans, and
garlic were eliminated. To ensure that final consumers obtained
maximum benefits from this reform, importers were allowed to
market all of these products domestically, except wheat (until
recently; see paragraph 44 below). Similarly, to ease the
adjustment costs for farmers, tariffs were simultaneously
introduced on all of these products, but these rates were limited
to 20 percent or less, and will be reduced to 5 percent by 2003.
33. In addition, two other important structural measures have
also been taken under the program. First, in November, the
administrative retail price for cement was eliminated, thereby
improving the degree of competition in this industry, and
immediately reducing prices for construction firms and consumers.
Second the medium-term tariff reduction program was extended to
cover two key additional sectors, chemicals and metal products.
Tariffs on most chemical products have already been reduced by 5
percentage points, effective Jan. 1, 1998 while those on
steel/metals will be lowered beginning Jan. 1, 1999. In line with
the overall program, further reductions in these tariffs are
scheduled for subsequent years, so that by 2003, the maximum
tariff on these products will be brought down to the medium-term
target of 10 percent.
34. Despite this steady progress, the economic crisis has
deepened during December and early January, making it clear that
bolder, and faster, reform will be necessary to overcome the
economy's problems. Accordingly, the government has decided to
reinforce its structural reform program, by accelerating some of
the measures that were earlier planned, and by supplementing them
with additional actions.
Foreign Trade and Investment
35. Over the past two months, it has become evident that the
drought afflicting the country is the most severe in half a
century, and requires emergency measures. Accordingly, to ensure
that adequate food supplies will be available to the population
at reasonable prices, the government has decided to go beyond the
original program strategy, and include agricultural goods in the
general program of tariff reduction (leaving motor vehicles as
the only exception). As an immediate measure, tariffs on all food
items have been cut to a maximum of 5 percent, while local
content regulations on dairy products have been abolished, both
effective Febr. 1, 1998. At the same time, tariff rates on non-
food agricultural products will be reduced by 5 percentage
points, and will gradually be reduced to a maximum of 10 percent
by 2003.
36. At the same time, as another major step in assuring a level
playing field, on Febr. 1, 1998, all import restrictions on all
new and used ships were also abolished. All other remaining
quantitative import restrictions, other than those which may be
justified for health, safety, environment and security reasons,
and other nontariff barriers that protect domestic production,
will be completely phased out by the end of the program period.
37. The government also intends to phase out punitive export
taxes, since these can no longer be justified, given the
country's now-pressing need to augment its inflows of foreign
exchange. Accordingly, on Febr. 1, 1998, export taxes on a wide
range of products -- including leather, cork, ores and waste
aluminum products -- will be abolished. For other products,
however, export taxes cannot simply be eliminated, since they
serve as an important means of discouraging overexploitation of
Indonesia's natural environment. In such cases, therefore, export
taxes will be replaced by resource rent taxes, which would
protect the environment, while eliminating the bias against
production for export, rather than for domestic use. As a first
step, in March 1998, exports taxes on logs, sawn timber, rattan,
and minerals will be reduced to a maximum of 10 percent ad
valorem, and appropriate resource rent taxes imposed. At the same
time, similar steps will be taken for all of the remaining items
currently subject to an export tax: the levies on exporting will
be abolished and replaced by resource rent taxes, where
appropriate.
38. The government will also eliminate all other types of export
restrictions, such as quotas, by the end of three years. The only
exceptions will be for those restrictions imposed for health and
security reasons, as well as time-bond, temporary, measures
introduced in the event of occasional domestic shortages -- such
as the recently imposed export ban on palm oil. This ban will
need to be retained through the first quarter of 1998, to ensure
adequate domestic supplies of palm oil and restrain price rises,
After March, however, it will not be renewed, nor will the
previous system of export quotas and punitive taxes will be
reintroduced. Instead, palm oil will be subject to export taxes
at rates not exceeding 20 percent.
39. Another pressing need in the current circumstances is to
encourage foreign investment. Accordingly, the government has
decided that in June 1998 it will issue a revised and shortened
negative list of activities closed to foreign investors. As part
of this process, the government has removed restrictions on
foreign investment in palm oil plantations on Febr. 1, 1998 while
those on wholesale and retail trade will be lifted by March 1998.
Deregulation and Privatization
40. The second major thrust of the structural reform strategy
will be to deregulate and privatize the economy, in order to
promote domestic competition and expand the scope of the private
sector. As a first, bold step, all of the existing formal and
informal restrictive marketing arrangement -- including those for
cement, paper, and plywood -- will be dissolved, as of Febr. 1,
1998. Henceforth, no firm will be forced to sell its product
through a joint marketing organization, nor be required to pay
fees or commissions to it. Neither will any organization be
allowed to assign exclusive marketing areas, or to dictate
production volumes or market shares to individual enterprises. In
the case of cement, internal and external trade restrictions have
also been eliminated, so that traders are now free to purchase
and distribute all brands of cement in all provinces and export
without acquiring permits other than a general exporters'
license.
41. Similarly, trade in agricultural products is also being
deregulated. Effective Febr. 1, 1998, traders will have the
freedom to buy, sell, and transfer all commodities across
district and provincial boundaries, including cloves, cashew
nuts, oranges, and vanilla. In particular, traders will be able
to buy and sell cloves at unrestricted prices to all agents,
effective immediately and the Clove Marketing Board will be a
eliminated by June 1998. The system of quotas limiting the sale
of livestock will be abolished by September 1998. Furthermore,
provincial government will be prohibited from restricting
interprovincial or intraprovincial trade, effective Febr. 1,
1998.
42. To support export expansion the government is now enforcing
the prohibition of retribusi (local taxes) at all levels on
export goods. To strengthen competition and market integration,
government will develop and implement a one-year program for
abolishing taxes on interprovincial and inter-district trade. Any
loss of local government revenue will be addressed through a
combination of local fuel taxes and transfers from the central
government.
43. BULOG's monopoly will be limited to rice. Earlier, the
government had planned that, following the November 1997
liberalization of wheat imports, domestic millers should
distribute their flour through BULOG for a 3-5 year transition
period. Now,however, we have decided to eliminate this
requirement, while flour millers will be permitted to sell or
distribute flour to any agent, both effective Febr. 1, 1998. Also
effective the same date, all traders will be allowed to import
sugar and market it domestically, while farmers will be released
from the formal and informal requirements for the forced planting
of sugar cane. This major measure will have a number of important
economic benefits. It will rationalize sugar production, enabling
old and inefficient government mills to be closed. It would
increase rice output, as farmers switched from growing cane on
irrigated land to producing higher value-added paddy. And it
would increase the efficiency and competitiveness of sugar-using
industries, such as food processing.
44. In parallel with these efforts to increase private sector
productivity, the government is undertaking a public sector
expenditure and investment review in order to promote a more
efficient use of government resources. This review, which is
being carried out in collaboration with the World Bank, will be
completed by June 1998 and will result in a comprehensive program
to improve fiscal efficiency, and restructure state-owned
enterprises and strategic industries.
45. This review will also be the basis for an accelerated program
of privatization. Already, oversight of public enterprises was
moved to the Ministry of Finance from line ministries and a
Privatization Board has been established. A clear framework will
be established for the management and privatization (either
through share flotation or negotiated enterprises sales) of
government assets by April 1998, including: (i) criteria for
determining whether enterprises should be closed, restructured or
fully privatized; and (ii) a transparent sales process that
maximizes the return to government and treats all bidders
equally.
46. Within this framework, the government aims to accelerate
privatization and to take decisive action to restructure or close
poorly performing enterprises. Twelve enterprises will be
prepared for listing during the first year of the program. In all
of these cases, the government intends to go beyond the recent
pattern of seeking minority shareholders in public enterprises,
by selling controlling, or even complete, stakes to the private
sector. In addition, further tranches of government-controlled
shares in public enterprises which are already listed will be
offered for sale, so that these enterprises, too, can be fully
privatized.
47. As for those enterprises remaining within the public
portfolio, clear profit and performance targets will be
established, which will be made public and reported upon
annually. Nonviable enterprises will be audited by end-1998 and
nonviable enterprises closed. Progress in this area will be
assessed at the time of the second review.
Social Safety Net
48. Indonesia has made significant progress in alleviating
poverty over the past 30 years. Yet large numbers of poor still
remain, and it is imperative that the adjustment program does not
result in a worsening of their economic and social conditions. To
some extent, the depreciation should benefit the rural poor by
raising output prices in the export-oriented agricultural sector.
Nonetheless, the poor are likely to suffer extensively from the
economic crisis, particularly as it has been compounded by an
unusually severe drought. In these circumstance, special
government initiatives will be necessary. In particular, the
government plans to introduce community-based work programs to
sustain the purchasing power of the poor in both rural and urban
areas.
49. In addition, efforts to target assistance to the poor will be
intensified, including by expanding the program for the least
developed villages, initiated in 1994, which has proved to be
cost effective in creating rural infrastructure and expanding
employment opportunities for the poor. Moreover, poverty
eradication and more equal income distribution are to be major
themes of the next five-year development plan, which begins in
1999. In particular, budgetary allocations for social spending
will be increased, so as to ensure that all Indonesians receive
at least nine years of education and better basic medical
services.
Environment
50. To strengthen overall environment the government will draft
and establish implementation rules for the new environmental law
by March 1998. In addition, government will review and raise
stumpage fees, auction concessions, lengthen the concession
period, and allow transferability by June 1998, and will
implement performance bonds and reduce land conversion targets to
environmentally sustainable levels by the end of 1998. To improve
air quality, the Government is accelerating its program for
conversion to cleaner fuels, including unleaded gasoline, to meet
the President's 1999 deadline.