Economy of Indonesia

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Economy of Indonesia
Currency	Rupiah
Fiscal year	Calendar year
Trade organisations	APEC, ASEAN, WTO, OPEC
Statistics
GDP (PPP)	$899bn (2005) (15th [1])
GDP growth	5.6% (2005)
GDP per capita	$3,700 (2005)
GDP by sector	agriculture (16.6%), industry (43.6%), services (39.9%) (2004)
Inflation (CPI)	17.1% (2005)
Pop below poverty line	27.1% (1998)
Labor force	105.7m (2004)
Labour force by occupation	manufacturing 46%, agriculture 16%, services 39% (1999)
Unemployment	10.3% (2005)
Main industries	petroleum and natural gas; textiles, apparel, and footwear; mining, cement, chemical fertilizers, plywood; rubber; food; tourism
Trading Partners
Exports	$63.89bn (2004)
Export goods	oil and gas, plywood, textiles, rubber
Main export partners	Japan 22.3%, United States 12.1%, Singapore 8.9%, South Korea 7.1%, the People's Republic of China 6.2% (2003)
Imports	$40.22bn (2003)
Import goods	machinery and equipment; chemicals, fuels, food
Main import partners	Japan 13%, Singapore 12.8%, China 9.1%, United States 8.3%, Thailand 5.2%, Australia 5.1%, South Korea 4.7%, Saudi Arabia 4.6% (2003)
Public finances
Public debt	$454.3bn (56.2% of GDP)
Revenues	$40.91bn (2004)
Expenses	$44.95bn (2004)
Economic aid	recipient: $43 billion from IMF (1997–2000)
Main source [2] All values, unless otherwise stated, are in US dollars

Indonesia has a market-based economy in which the government plays a significant role. It owns more than 164 state-owned enterprises and administers prices on several basic goods, including fuel, rice, and electricity. In the aftermath of the financial and economic crisis that began in mid-1997, the government took custody of a significant portion of private sector assets through acquisition of nonperforming bank loans and corporate assets through the debt restructuring process.

Contents 1 Background 2 Oil and minerals sector 3 Investment 4 Economic relations with the United States 5 Macro-economic trend 6 See also

[edit] Background

Current GDP per capita grew an astonishing 545% in the Seventies fuelled by oil demand. But this proved unsustainable and growth fell sharply to a manageable 20% in the Eighties and 13% in the Nineties.

During the thirty years of president Suharto's "New Order" government, Indonesia's economy grew from a per capita GDP of $70 to more than $1,000 by 1996. Through prudent monetary and fiscal policies, inflation was held in the 5%–10% range, the rupiah was stable and predictable, and the government avoided domestic financing of budget deficits. Much of the development budget was financed by concessional foreign aid.

In the mid-1980s, the government began eliminating regulatory obstacles to economic activity. The steps were aimed primarily at the external and financial sectors and were designed to stimulate employment and growth in the non-oil export sector. Annual real GDP growth averaged nearly 7% from 1987–1997, and most analysts recognized Indonesia as a newly industrializing economy and emerging major market.

High levels of economic growth from 1987–1997 masked a number of structural weaknesses in Indonesia's economy. The legal system was very weak, and there was and is no effective way to enforce contracts, collect debts, or sue for bankruptcy. Banking practices were very unsophisticated, with collateral-based lending the norm and widespread violation of prudential regulations, including limits on connected lending. Non-tariff barriers, rent-seeking by state-owned enterprises, domestic subsidies, barriers to domestic trade, and export restrictions all created economic distortions.

The regional financial problems that swept into Indonesia in late 1997 quickly became an economic and political crisis. Indonesia's initial response was to float the rupiah, raise key domestic interest rates, and tighten fiscal policy. In October 1997, Indonesia and the International Monetary Fund (IMF) reached agreement on an economic reform program aimed at macroeconomic stabilization and elimination of some of the country's most damaging economic policies, such as the National Car Program and the clove monopoly, both involving family members of President Suharto. The rupiah failed to stabilize for any significant period of time, however, and President Suharto was forced to resign in May 1998. In August 1998, Indonesia and the IMF agreed on an Extended Fund Facility (EFF) under President B.J Habibie that included significant structural reform targets. President Abdurrahman Wahid took office in October 1999, and Indonesia and the IMF signed another EFF in January 2000. The new program also has a range of economic, structural reform, and governance targets.

The effects of the financial and economic crisis were severe. In 1998, real GDP contracted by an estimated 13.7%. The economy bottomed out in mid-1999, and real GDP growth for the year was an anemic 0.3%. Inflation reached 77%in 1998 but slowed to 2% in 1999. The rupiah, which had been in the Rp 2,400/USD1 range in 1997 reached Rp 17,000/USD1 at the height of the 1998 violence, returned to the Rp 6,500–8,000/USD1 range in late 1998. It has traded in the Rp 6,500–9,000/USD1 range since, with significant volatility. Although a severe drought in 1997–1998 forced Indonesia to import record amounts of rice, overall imports dropped precipitously in the early stage of the crisis in response to the unfavorable exchange rate, reduced domestic demand, and absence of new investment. Although reliable unemployment data are not available, formal sector employment contracted significantly.

In late 2005 Indonesia faced a 'mini-crisis' due to international oil prices rises and imports. The currency reached Rp 12,000/USD1 before stabilizing. The government was forced to cut its massive fuel subsidies, which were to cost $14 billion for 2005, in October.^[1] This led to a more than doubling in the price of consumer fuels, resulting in double-digit inflation. The situation has stabilized, but the economy continues to struggle with inflation at 17% in January 2006. To mitigate consequent economic hardship, the government has offered one-time subsidies to eligible citizens, effectively becoming Indonesia's first significant government-funded social security benefit scheme.^[2]

As of early 2006, Indonesia's economic outlook is more positive. Economic growth accelerated to 5.1% in 2004 and reached 5.6% in 2005. Real per capita income has reached pre-crisis levels. Growth is driven primarily by domestic consumption, which accounts for roughly three-fourths of Indonesia's gross domestic product. The Jakarta Stock Exchange was the best performing market in Asia in 2004, up some 42%. Problems that continue to put a drag on growth include low foreign investment levels, bureaucratic red tape, and widespread corruption. However, there is very strong optimism with the conclusion of peaceful elections during the year 2004 and the election of the reformist president Susilo Bambang Yudhoyono.

[edit] Oil and minerals sector

Indonesia is the only Asian member of the Organization of Petroleum Exporting Countries (OPEC) outside of the Middle East, and is the only OPEC member that is a net oil importer. In early 2005, Indonesian crude oil and condensate output was 1.07 million barrels per day. This is a substantial decline from the 1990s, due primarily to aging oil fields and a lack of investment in oil production equipment. In 1999, Crude and condensate output averaged 1.5 million barrels (240,000 m³) per day, and in the 1998 calendar year the oil and gas sector, including refining, contributed approximately 9% to GDP. This decline in production since the 1990s has been accompanied by a substantial increase in domestic consumption, about 5.4% per year, leading to an expected US$1.2 billion cost for importing oil in 2005.

The state owns all petroleum and mineral rights. Foreign firms participate through production-sharing and work contracts. Oil and gas contractors are required to finance all exploration, production, and development costs in their contract areas; they are entitled to recover operating, exploration, and development costs out of the oil and gas produced. According to President Susilo Bambang Yudhoyono, the nation is expected to deplete its crude oil reserves in about 2020.

Indonesia is the world's largest tin market. Although minerals production traditionally centered on bauxite, silver, and tin production, Indonesia is expanding its copper, nickel, gold, and coal output for export markets. In mid-1993, the Department of Mines and Energy reopened the coal sector to foreign investment, with the result that the leading Indonesian coal producer now is a joint venture between UK firms BP and Rio Tinto. Total coal production reached 74 million metric tons in 1999, including exports of 55 million tons. The Indonesian Government hopes to surpass 100 million metric tons of coal production in 2002. Two US firms operate three copper/gold mines in Indonesia, with a Canadian and British firm holding significant other investments in nickel and gold, respectively. In 1998, the value of Indonesian gold production was $1 billion and copper, $843 million. Receipts from gold, copper, and coal comprised 84% of the $3 billion. Earned in 1998 by the mineral mining sector.

Indonesia's fuel production has declined significantly over the years, owing to aging oil fields and lack of investment in new equipment. As a result, despite being an exporter of crude oil, Indonesia is now a net importer of oil and had previously subsidized fuel prices to keep prices low, costing US$ 7 billion in 2004 [3]. The current president has mandated a significant reduction of government subsidy of fuel prices in several stages [4]. In order to alleviate economic hardships, the government has offered one-time subsidies to qualified citizens. The economy is now undergoing a process of rebuilding after the tsunami that struck in December of 2004. The government has stated the cuts in subsidies are aimed at reducing the budget deficit to 1% of gross domestic product (GDP) this year, down from around 1.6% last year.

[edit] Investment

Since the late 1980s, Indonesia has made significant changes to its regulatory framework to encourage economic growth. This growth was financed largely from private investment, both foreign and domestic. U.S. investors dominated the oil and gas sector and undertook some of Indonesia's largest mining projects. In addition, the presence of US banks, manufacturers, and service providers expanded, especially after the industrial and financial sector reforms of the 1980s. Other major foreign investors included Japan, the United Kingdom, Singapore, the Netherlands, Hong Kong, Taiwan, and South Korea.

The economic crisis made continued private financing imperative but problematic. New foreign investment approvals fell by almost two-thirds between 1997 and 1999. The crisis further highlighted areas where additional reform was needed. Frequently cited areas for improving the investment climate were establishment of a functioning legal and judicial system, adherence to competitive processes, and adoption of internationally acceptable accounting and disclosure standards. Despite improvements in the laws in recent years, Indonesia's intellectual property rights regime remains weak; lack of effective enforcement is a major concern. Under Suharto, Indonesia had moved toward private provision of public infrastructure, including electric power, tollroads, and telecommunications. The financial crisis brought to light serious weaknesses in the process of dispute resolution, however, particularly in the area of private infrastructure projects. Although Indonesia continued to have the advantages of a large labor force, abundant natural resources and modern infrastructure, private investment in new projects largely ceased during the crisis.

In May 2004, an Indonesian court may have compounded the country's troubles attracting foreign investment when it ruled in favor of a petition by Indonesian chemical company, Tri Polyta, that a bond issue be declared illegal and nullified, freeing that company of its obligation to repay its debts.

[edit] Economic relations with the United States

U.S. exports to Indonesia in 1999 totaled $2.0 billion, down significantly from $4.5 billion in 1997. The main exports were construction equipment, machinery, aviation parts, chemicals, and agricultural products. U.S. imports from Indonesia in 1999 totaled $9.5 billion and consisted primarily of clothing, machinery and transportation equipment, petroleum, natural rubber, and footwear. Economic assistance to Indonesia is coordinated through the Consultative Group on Indonesia (CGI), formed in 1989. It includes 19 donor countries and 13 international organizations that meet annually to coordinate donor assistance. The 2000 CGI meeting is to be held 17 October-18 in Tokyo.

The U.S. Agency for International Development (USAID) has provided development assistance to Indonesia since 1950. Initial assistance focused on the most urgent needs of the new republic, including food aid, infrastructure rehabilitation, health care, and training. Through the 1970s, a time of great economic growth in Indonesia, USAID played a major role in helping the country achieve self-sufficiency in rice production and in reducing the birth rate.

USAID's current program aims to support Indonesia as it recovers from the financial crisis by providing food aid, employment generating activities, and maintaining critical public health services. USAID is also providing technical advisers to help the Indonesian Government implement economic reforms and fiscal decentralization and is supporting democratization and civil society development activities through non-governmental organizations.

[edit] Macro-economic trend

This is a chart of trend of gross domestic product of Indonesia at market prices estimated by the IMF with figures in millions of rupiah.

Year	GDP	USD exchange (rupiah)	Inflation index (2000=100)
1980	60,143,191	626.98	12
1985	112,969,792	1,110.58	20
1990	233,013,290	1,842.80	29
1995	502,249,558	2,248.60	44
2000	1,389,769,700	8,396.33	100
2005	2,678,664,096	9,705.16	155

For purchasing power parity comparisons, the US dollar is exchanged at 3,094.57 rupiah only.

[edit] See also

• Taxation in Indonesia
• Next Eleven
• Positive market perception of Indonesian stock market(2007)

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