RECENT ECONOMIC REPORTS

4. Debt Management Policies

Indonesia's foreign debt totaled $137.6 billion as of August 2001, with about $74 billion owed by the public sector and $63 billion by the private sector. Indonesia and the Paris Club group of official creditors agreed to a second rescheduling agreement for official debt in April 2000 covering $5.8 billion in principal payments falling due from April 1, 2000 to March 21, 2002. In late September 2000, Bank Indonesia reached a parallel agreement with the London Club of commercial creditors to reschedule $340 million in principal installments on two standby loans received from a syndication of banks in 1994 and 1995.

In 1999, the government introduced a monitoring system to collect information on all foreign exchange transactions, including foreign borrowing. Borrowing in connection with state-owned enterprises has been regulated since 1991. The government continues to assert that it will not impose capital controls.

5. Significant Barriers to U.S. Exports

In recent years, Indonesia has liberalized its trade regime and taken a number of important steps to reduce protection. Since 1996, the Indonesian government has issued a series of deregulation packages intended to encourage foreign and domestic private investment. These packages have reduced overall tariff levels, simplified the tariff structure, removed restrictions, and replaced non-tariff barriers with more transparent tariffs.

Despite the severe economic crisis of the past four years, Indonesia has maintained its policy of steady long-term tariff liberalization. Indonesia's applied tariff rates range from 5 to 30 percent, although bound rates are, in many cases, much higher. The major exceptions to this are the 170 percent duty rates applied to all imported distilled spirits, and the tariffs on motor vehicles and motor vehicle kits. Consecutive IMF programs in which Indonesia committed to implement a three-tier tariff structure (0, 5 or 10 percent) on all imported products, except motor vehicles and alcoholic beverages, have reinforced the long-term liberalization policy. Indonesia also committed to eliminate all non-tariff barriers, except those for health or safety reasons, by the end of 2001. The ongoing domestic political crisis and deteriorating relations with the IMF may delay that timetable somewhat. More effective tariff liberalization has come from the ASEAN Free Trade Agreement under which members committed to a Common Effective Preferential Tariff (CEPT) scheme for most traded goods by 2003. Indonesia implemented its second stage of AFTA tariff reductions on January 1, 2001.

Import tariffs on vehicles were lowered in June 1999 to 25-80 percent (depending on engine size), 0-45 percent for trucks, and 25-60 percent for motorcycles. The government also lowered rates for parts to a maximum 15 percent. Luxury taxes for sedans range from 10-75 percent, for trucks 0 percent, and for motorcycles 0-7550 percent.

Services trade barriers to entry continue to exist in many sectors, although the Government of Indonesia has loosened restrictions significantly in the financial sector. Foreign law firms, accounting firms, and consulting engineers must operate through technical assistance or joint venture arrangements with local firms.

Indonesia has liberalized its distribution system, including ending some restrictions on trade in the domestic market. For example, restrictive marketing arrangements for cement, paper, cloves, other spices, and plywood were eliminated in February 1998. Indonesia opened its wholesale and large-scale retail trade to foreign investment, lifting most restrictions in March 1998. Some retail sectors are still reserved for small-scale enterprises under another 1998 decree. Large and medium scale enterprises that wish to invest in these sectors must enter into a partnership agreement with a small-scale enterprise, although this may not require a joint venture or partial share ownership arrangement.

The weakness of the central government in a period of significant political upheaval has encouraged special interests, especially in the agricultural sector, to seek to reinstate some former special trade privileges. So far these efforts have had limited success but the trend is worrisome. Food labeling regulations requiring labels in the Indonesian language and expiration date (rather than the standard "best used by" date) are in place, but are not being enforced. A product registration regulation is also in place that requires detailed product processing information that approaches proprietary information. The registration procedure can also be quite lengthy and expensive. Indonesian importers and U.S. exporters have expressed concern that these regulations could act as non-tariff barriers to imports of packaged food products.

New laws on regional autonomy and fiscal decentralization have granted significant new powers to provincial and sub-provincial governments. Local governments have begun to impose new tax or non-tax barriers on inter-regional trade as they seek new sources of local revenue. Implementing regulations have not been issued to fully clarify the authority and responsibility of the different levels of government.

Investment Barriers: The government is committed to reducing burdensome bureaucratic procedures and substantive requirements for foreign investors. In 1994, the government dropped initial foreign equity requirements and sharply reduced divestiture requirements. Indonesian law provides for both 100 percent direct foreign investment projects and joint ventures with a minimum Indonesian equity of five percent. The government most recently revised its so-called "negative investment list" in July 2001. Sectors that remain closed to all foreign investment include taxi and bus transportation, local marine shipping, film production, distribution and exhibition, radio and television broadcasting and newspapers, some trade and retail services, and forestry concessions. The government removed foreign ownership limitations on banks and on firms publicly traded on Indonesian stock markets.

The Capital Investment Coordinating Board (BKPM) must approve most foreign investment proposals. Investments in the oil and gas, mining, forestry, and financial services sectors are covered by specific laws and regulations and handled by the relevant technical ministries. With the implementation of political and fiscal decentralization, provincial investment boards now play a much great role in approving foreign investments in their regions.

Government Procurement Practices: Technical guidelines for government procurement of goods and services are governed by Presidential Decree (Keppres) No. 18/2000. The decree establishes set-asides for small- and medium-sized enterprises according to the size of the procurement. Foreign suppliers are restricted to contracts worth over Rp. 10 billion ($1.2 million) for goods/services and over Rp. 2 billion ($230,000) for consulting services. A foreign supplier is required to cooperate with a small- or medium-sized company or cooperative in the implementation of the contract. Bilateral or multilateral donors, who specify procurement procedures, finance most large government contracts. For large projects funded by the government, international competitive bidding practices are to be followed. The government seeks concessional financing which includes a 3.5 percent interest rate, a 25-year repayment period and seven-year grace period. Some projects do proceed on less concessional terms. Foreign firms bidding on certain government-sponsored construction or procurement projects may be asked to purchase and export the equivalent in selected Indonesian products. Government departments and institutes and state and regional government corporations are expected to utilize domestic goods and services to the maximum extent feasible, but this is not mandatory for foreign aid-financed goods and services procurement. State-owned enterprises that have offered shares to the public through the stock exchange are exempted from government procurement regulations.

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