President Soeharto's State of the Nation Address

Following are excerpts of the state address given by President Soeharto before the House of Representatives on the occasion of the 52nd anniversary of Indonesia's Independence Day Aug. 17.

During the last general election, we carried out campaigns in the form of dialogues. Although open and mass campaigns were still carried out, these were complemented with other forms of campaigning that allowed the general election's contesting organizations to conduct direct dialogues with the public or to capitalize on the use of electronic mass media.

Through the general election campaigns, the three contesting organizations offered their development themes and programs. They also focused their attention to a host of development issues. These dialogues also revealed the people's aspirations that may serve as materials for the people's representatives in drafting the next 1998 Guidelines of State Policy.

As in the previous general election, nine out of ten eligible voters exercised their rights. The general election took place openly and the public participated very seriously in it, as did the mass media, whether local, national or even international. No one can deny the fact that 90 percent of the Indonesian people exercised their voting right, the most concrete political right. There are not many countries in the world that equal this feat.

Indeed, beside these successes, there were some disturbances that claimed victims in various places. We are concerned about the tragic events. We offer our deepest condolences for their deaths. These disturbances were excesses during the campaigns due to over-enthusiasm and as a result of an emotion that easily flared up during an event that involved a big mass. Quite often the campaigns in an open field were attended by tens, and even hundreds of thousands of people. These were often started and ended by convoys that opened the possibility of excesses in the form of mass brutality, accidents and clashes between supporters of one general election contestant against other rival organizations. Or clashes between the masses and security forces who had the duty to maintain law and order and security as well as protect the public safety.

In entering the new era where everything is so open, in which the force of information flow cannot be easily stemmed, we must never underestimate the potential dangers threatening the unity and cohesion and, in fact, the very fabric of our nation's life. These threats may come from everywhere, both from within or without or a combination of both. We must confront them jointly by adhering strictly to the lofty values of life enshrined in Pancasila and the 1945 Constitution. We should steadfastly hold to the course we are pursuing.

The opening horizon and knowledge as a result of information explosion makes us constantly dissatisfied. This trend is in itself sound, because the desire to get better things serves as a strong impetus to work even harder. This trend can also have a negative impact when it stimulates the desire to make a shortcut, when the end justifies the means. Worse even when unlawful and unjust acts are committed.

The openness of the society may also endanger our young generation through the infiltration of negative influences via various media and information. The people's progress and the modern life's hectic schedules may have an impact on family life and make our children drift apart from their parents. Drug abuse is a major issue, and therefore we must be vigilant and overcome it seriously.

The prosperity and peace in a region will enhance prosperity and world peace. This is the reason why we give primary attention to the relations with neighboring countries and cooperation in this region.

Entering its 30th anniversary, ASEAN has become a growingly mature regional organization. There are more concrete cooperations, so that this region has become more peaceful, stable, advanced and prosperous. In the not-too-distant future, in just another five years, this region will become a free trade area.

In its evolution, ASEAN has expanded its membership. All nations in this region, irrespective of their cultural backgrounds and political systems, may benefit from this regional cooperation and, in turn, reinforce it. Last year Vietnam was admitted as a full-fledged member, followed this year by Laos and Myanmar. We hoped that Cambodia would join this year, but it looks that she still has to solve her internal problem. We hope the process towards its solution will proceed quickly and peacefully. Without intending to interfere in the domestic affairs of other countries, Indonesia, together with other ASEAN member-states, stand ready to help if it is requested by the conflicting parties in that country.

Meanwhile, there are still upheavals in other regions that affect the stability of their respective regions and, to a certain extent, may create wide-ranging consequences. In the Middle East, the peace process continues, we deeply regret, to face obstacles. Indonesia is concerned about these developments, and hopes that peace negotiations are resumed so that the Palestinian people in particular and the Arab world in general shall regain their legitimate and just rights.

We live in a fast-changing world. The world seems to become a huge economic entity. Quite often what takes place in a country or region will immediately have an impact on another country or region. Mankind is entering a new age: an open global economy and free trade.

The recent upheavals affecting the currencies of several countries in the Southeast Asian region has been a concrete evidence of the adverse impact of an open global economy.

It started with the Thai baht and then spread to other currencies, including the rupiah. Apparently, this has been caused by two reasons. Firstly, there has been a change on the market perception of the economic conditions and prospects of countries in the region. Secondly, it is a fact that the U.S. dollar tends to continue its appreciation vis-a-vis almost all other currencies in the world, due to the very good economic condition of the United States. As a result, the rupiah --together with other currencies-- have depreciated against the U.S. dollar. The speculative actions by certain individuals have worsened the situation and raised the market sensitivity.

By taking market forces into account, the government has taken some measures to soften the onslaught against our rupiah.

As we all know, the government has decided to abolish the rupiah intervention band spread. The rupiah exchange rate is determined by the market, while the government may intervene indirectly through fiscal and monetary policies. This is the continuation of measures to prop up the flexibility of our foreign exchange rate system through band spread interventions that were carried out eight times since 1992.

The experience of countries in this region and in other regions as well shows that with the increasingly large flow of funds on the global level, it is difficult to maintain the exchange rate of a currency which is tied to other currencies or a basket of currencies. In such a situation, the effort to maintain an exchange rate at a certain level is ineffective. The recent experience in a number of countries in this region --and also in several developed countries-- the intervention to maintain a certain exchange rate level apparently failed, despite the substantial amount of foreign exchange reserves which were used. Therefore, the majority of countries in the world are now relying on a flexible foreign exchange rate system.

The experience of other countries also shows that the transition towards a flexible foreign exchange rate system has always been marked by excessive exchange rate upheavals. But it is of a temporary nature and, with the appropriate policy and the calmness of domestic players, the exchange rate will find a new equilibrium in line with the prevailing economic fundamentals. At present, Indonesia's economic fundamentals are very solid. During this transitional period, the relatively tight fiscal and monetary policies will be maintained until the market situation is calm again and the exchange rate becomes relatively stable at a new level of equilibrium. Our business community should immediately adjust itself to this new situation.

We notice that any currency can fluctuate very quickly. The exchange rate fluctuation of one currency can quickly affect several other currencies. This fact can not be ignored by any country or economic player. The recent experience has taught us a valuable lesson that in a situation full of uncertainties and upheavals, the economic fundamentals condition is very important and decisive. We notice the tradition of prudent macroeconomic measures we have been adopting plays an increasingly pivotal role as a security anchor of our economy. Our determination to accelerate development must be accompanied by our wisdom of sparing ourselves form the enthusiasm itself, that may lead us to be severed from this security anchor.

I appeal to our business community, whether those involved in the financial sector or otherwise, to seriously understand these new realities. They shall all discover that foreign loans are no longer easily and cheaply obtained like before the storm. All parties concerned are reminded by the recent events to act prudently in borrowing, in order not to rely excessively on loans to finance their business and to seek safer and steadier ways of funding. All are called upon to make a rational and realistic projection about the growth of their business.

Furthermore, in a situation where currency fluctuation may happen at any time, the business community is demanded to seriously take into account the risk of currency fluctuation in their business operation and project implementation. They have to get used to protecting themselves from this currency risk by capitalizing on the existing instruments. These are all normal business practices in many advanced countries.

The recent events have also made us realize the importance of closer relations amongst nations to face regional and international monetary upheavals. In the end, all of us, particularly countries in the Asia-Pacific area, will need a common safety network system to address these global upheavals.

I would like to repeat my appeal to all APEC economic leaders during the meeting in Seattle, the United States, three years ago, that developed and economically-strong countries in the Asia-Pacific region should play an appropriate role in line with their potentials and positions to establish such a common safety network.

Upheavals and speculations will always happen from time to time. The key rests in our own economic resilience, on the resilience of our business community, on our own self-confidence and on the congruency of views between the Government and economic players at home.

In the effort to overcome the alarming situation in the ASEAN region, especially what took place in Thailand, Indonesia warmly welcomes the policy package adopted by the Thai Government to shore up its economy. Indonesia appreciates the initiative taken by the International Monetary Fund (IMF) to assist the Thai government to recover from its economic difficulties. As a manifestation of ASEAN solidarity, together with other countries, Indonesia has provided a stand-by loan to the tune of US$ 500 million. Indonesia hopes that the Thai economy will fully recover soon. This is very important for the maintenance of economic stability in the ASEAN region and, in turn, our economic stability too.

Our economic stability is demonstrated by, among other things, the controlled inflation rate and the foreign exchange reserves that are maintained within a safe limit.

In fact, the inflation rate tends to continue to decline. At the start of REPELITA VI, the inflation rate was still 9.2 percent. Gradually, it was lowered to 8.6 percent in 1995 and 6.5 percent in 1996. As a matter of fact, when it is calculated according to the fiscal year, the inflation rate in 1996-'97 was 5.2 percent, which means that it moved closer to the target set for the end of REPELITA VI. Another encouraging phenomenon is the declining rate of price increases of foodstuffs from 13.3 percent in 1995 to less than half of it, i.e. 6.1 percent last year. This is important because more than half of the expenses spent on public consumption was still on food.

We are increasing production capacity and ensuring equitable distribution in a sustainable manner through, among other things, the adoption of several debureaucratization and deregulation measures.

These various efforts have consolidated a sounder import and export balance. The measures to control the people's and government's demands have slowed down the import rate. In 1995- 1996, the import rate reached 21.6 percent and it went down sharply in 1996-1997 to 10.4 percent. However, we still have difficult homework. We must work hard to increase further the export rate which has recently tended to slow down.

By controlling the import rate, we have succeeded in curbing the increasing rate of the current account deficit. Whereas during the previous three years, from the last year of REPELITA V until the second year of REPELITA VI, the ratio between the current account deficit vis-a-vis gross domestic products has risen from 1.9 percent to 3.4 percent, for 1996-1997, it went up by only 0.1 percent to become 3.5 percent. Among countries that are also growing rapidly in our vicinity, this figure is among the lowest.

Although the current account deficit is expanding, the balance of payments remains safe as a result of the substantial inflow of capital. The potential of foreign exchange reserves to finance import has in fact increased, i.e. from 4.6 months at the end of 1995-1996 to 5.5 months last July.

Economic growth is an important development indicator, because increased production and national income show higher economic potentials of the people.

Until the third year of REPELITA VI, our economy has grown with an average of 7.9 percent annually. This growth rate is quite high compared to the average goal set for REPELITA VI, even after being revised, i.e. 7.1 percent annually. According to the latest count, the economic growth in 1996 reached 7.98 percent. This is higher than the provisional estimate released to the public some time ago, which was 7.82 percent.

With such an economic growth and the population growth rate which we have lowered to 1.58 percent, our per capita income in the third year of REPELITA VI has become US $ 1155. Compared to the figure at the start of REPELITA I, then our per capita income has multiplied by 16 times.

Such a high economic growth was spurred by the great enthusiasm in investment. In the past 1996-1997 fiscal year, the approved domestic investment reached more than Rp 105 trillion), which means an increase by around 20 percent from the previous year. The number of approved foreign investments continues to be high, although not as high as the previous year. The value of approved foreign investments totaled US$ 26.6 billion.

These investments are part of our national investment. The data in the national income statistics --which recorded the over- all national investment-- also show the high investment enthusiasm. The average real investment rate during the three years of REPELITA VI is 12.8 percent.

In terms of production, the non-oil/gas processing industry has grown at an average of 12.8 percent annually during the three years of REPELITA VI. We make this industry the motor of development. As a whole, the role of the non-oil/gas processing industry sector in the national production continues to become more important from around one-fifth in 1990 to more than a quarter in 1996. The enhanced role of this sector has also been accompanied by the growing number of business units in this sector that surpassed the average growth of similar units as a whole. According to the preliminary data of the 1996 Economic Census, during a one-decade period, the number of units in this sector rose to around 6 percent annually. This is far higher than the average growth of all sectors of 2.9 percent.

In line with the industrialization process, the share of the agricultural sector in the national product is expected to continue to decline. However, its share in the economy remains extremely vital, as a source of foodstuffs, as basic materials for industry and also as a source of income for millions of farmers. The availability of food does not indeed have to be produced by ourselves. But the number of our population today reaches more than 200 million. Although its growth rate is slow, but in absolute terms the population growth rate is still quite high. Unless this situation is followed by the ability to produce adequate foodstuffs, it will become a source of vulnerability to the national economic resilience.

The agricultural development has increased the number of available foodstuffs; such as rice, maize, vegetable oil, meat, eggs, and fish. At the same time, the average per-capita/day energy and protein requirements have reached 3208 kilocalories energy and 73.1 grams protein. This means that we have exceeded the recommended requirement of 2500 kilocalories energy and 55 grams protein. Meanwhile, the average consumption of energy per- capita/day has reached almost 2020 kilocalories, as it draws even closer to the recommended figure of 2150 kilocalories. As far as protein is concerned, the average per-capita/day consumption has reached 54.5 grams, higher than the recommended 46.2 grams.

Agricultural development cannot be separated from the support of other sectors, especially the irrigation. Irrigation development during 1996-'97 has extended irrigated areas to 68,000 hectares, both in the rain-water catchment areas or by the opening of new production areas and the making of new 120,000 hectares of paddy fields.

Development of other economic infrastructures such as transportation, telecommunications and power stations-- has stimulated higher production and smoother flows of goods and services as the bloodline of the economy. The development of infrastructure has stimulated the growth of residential and housing complexes, especially people's housing.

The increasingly extended and improved quality of these infrastructures has also allowed the potential to exploit physical and non-physical resources, including tourism. The number of foreign tourists who came to Indonesia during the third year of REPELITA VI reached 5.1 million, one and a half times more compared to that when we started the current development plan. They have spent US$ 6.2 billion in Indonesia.

The eastern part of Indonesia has apparently posted a better economic growth than the Western part. In 1994 and 1995, the economic growth in the Eastern part was 8.6 percent and 8.2 percent respectively. During the same period, the Western part had a growth rate of 7.2 percent and 7.9 percent. One of the influential factors on rural development is human resources. This is especially true in the Eastern part where the population is scarce, so that the transmigration program plays quite an important role.

Equitable distribution of development -- whether intra-regions or intra-income-earner groups -- is indeed a major endeavor in REPELITA VI.

In this connection, the poverty alleviation program draws the greatest attention. The Least-Developed Village INPRES-IDT) program --entering its fourth year-- is one of these high priority programs. The result has been the greater decline in the number of poor people between 1993 and 1996. During this period, the number of poor people went down by 3.4 million or 13.1 percent compared to the decline that took place three years earlier --i.e. from 1990 to 1993-- which was 1.3 million or 4.8 percent.

The effort that we have been carrying out for a long time and we shall continue to improve it, is the Small-Scale Enterprise Credit (KUK). To provide sufficient supply of capital for small enterprises, the minimum credit line for KUK is raised from 20 percent to 22.5 percent. To ensure that this is an opportunity worth seizing, additional technical assistance is also provided. This is executed through various activities, such as the Small- Scale Enterprise Development Project, Bank-Non-Governmental Group Relations Project and Micro-Credit Project. The rural financial institutions also play a role through the cooperation between the Small-holder Credit Bank and the public bank. In addition to these efforts was the obligation of (state-owned banks) to provide Business Feasibility Credit (KUK), with a simplified system and softer terms. With these measures, the minimum ratio of the KUK as a whole was surpassed in 1996, i.e. it reached 22.6 percent.

In the context of intensifying rural cooperatives activities, efforts are being made to enhance public confidence in cooperatives which is accompanied by institutional reforms and improvement. As a result, there is a greater number of Village Unit Cooperatives (KUD), Self-Supporting KUD and Self-Supporting Nucleus KUD, which are widely spread.

Whereas in 1993 the number of Self-Supporting KUD was more than 6500 units, it grew to over 6700 units in 1996, spread in 3500 Sub-districts or about 97 percent of all the subdistricts that need the KUDs. In every district there is also at least one Self-Supporting Nucleus KUD that functions as the motivator to stimulate the growth of cooperatives in the surrounding areas.

Today, there are more than 3300 Self-Supporting Cooperatives in all Indonesian cities, consisting of 1900 employees' cooperatives and over 1400 other urban cooperatives. In each municipality there is at least one Self-Supporting Nucleus Urban Cooperative that also serves as the motor in stimulating the growth of cooperatives in the surrounding areas.

The number of cooperatives members has risen from around 24.6 million in 1993 to more than 27 million in 1996. Its business volume also grew larger, from around Rp 9.5 trillion in 1993 to Rp 12.5 million in 1996.

Besides new employment opportunities, continued attention is always given to the workers' welfare. Pursuant to the mandate of the 1993 Guidelines of State Policy, it is envisaged that in REPELITA VI the regional minimum wage should gradually meet the minimum basic needs. In 1996, the regional minimum wage reached 92.5 percent of the minimum basic needs. We hope this target will be reached by the end of REPELITA VI.

However, increased wage must be accompanied with higher productivity. Otherwise, we will lose our competitive edge. This must not happen, precisely at a time when the enhancement of competitive edge is greatly needed.

One of the principal pillars for the quality improvement of human resources is educational development. Its primary goal is equitable distribution of educational opportunities. This is demonstrated by, among other things, the gross participation rate (APK), namely the ratio between the number of students of a certain educational level and the number of people belonging to the age group of the same educational level.

The APK at the public and Islamic primary schools level has surpassed 100 percent, whereas the APK at the public and Islamic secondary schools level has reached 68.7 percent. At the higher education level, the rate is also heartening. At the time when we started development, the number of students was only around 160,000; but in 1996-1997 it grew to approximately 2.5 million or an increase by 15 times.

Window A: Upheavals and speculations will always happen from time to time. The key rests in our own economic resilience, on the resilience of our business community, on our own self-confidence and on the congruency of views between the Government and economic players at home.

Window B: Our economic stability is demonstrated by, among other things, the controlled inflation rate and the foreign exchange reserves that are maintained within a safe limit.