INDONESIA ECONOMIC TRENDS 1999
-- SIGNS OF LIFE

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Policy Outlook -- Continuity Expected

43. Though the politics remained uncertain as of mid-1999, the economic policy outlook was less so. That was primarily because of the widespread acceptance among political parties that continued IMF/international financial institution assistance and monitoring was essential during the recovery period. Agreement on the IMF's continued role suggested that the main lines of economic policy would not change drastically in the near term.

Short term

44. Over the short term (roughly 1999-2001), any new government's economic policy would have to focus primarily on financial and real sector recovery. In that context, there were indications from across the political spectrum that the IMF/international institution-assisted program was broadly accepted - despite some dissenting voices calling for an end to what was seen as excessive outside meddling in policymaking -- and needed, both in terms of the technical assistance it provided and the continuing disbursements of loans. The IMF's role in stabilizing the economy starting in mid-1998 was generally acknowledged.

45. The favorable view of the IMF was consistent with, and in a sense a product of, the close working relationship between the GOI and the IMF and other international financial institutions that developed under the Habibie government. Since June 1998, the GOI met its commitments consistently enough to keep the flow of borrowing from the IMF steady (see Table 11 for chronology), and Indonesians could see the results by watching the exchange rate strengthen and interest rates and inflation decline. This was in marked contrast to the sometimes confrontational relationship between the two during October 1997-May 1998 under President Soeharto. During the earlier period, the economic program appeared to have little stabilizing effect in the context of a destabilizing political situation.

46. In July 1999, it seemed a part of Indonesia's economic policy routine when the government of Indonesia signed a further revision to its August 1998 Extended Fund Facility, which replaced the November 1997 Stand-by Arrangement. In August, the IMF was expected to disburse US$ 200 million in funds, bringing Indonesia's total borrowings from the IMF to US$ 11.3 billion out of a program expected to total US$ 12.4 billion.

47. This background suggested that the IMF, as well as the World Bank and Asian Development Bank, would continue to play an important role during the late 1999 transition to a new government and beyond. That in turn suggested that Indonesia would retain its orthodox economic policies, open trade regime, and free capital flow orientation during the recovery period. However, there were a number of important unknowns. The possibility of a new president, a new set of economic cabinet ministers, and a more active and politically diverse parliament was bound to affect the relationship between Indonesia and the international financial institutions.

Longer term

48. The economy was being restructured, and important aspects of the political system rebuilt as of mid-1999. It was impossible, given the unprecedented scale of change occurring, to predict what the system would look like when the political transition was complete and the economy recovered. Even so, if the IMF's continuing involvement suggested policy continuity over the short term, Indonesia's pre-crisis economic orientation suggested that the economy would retain its marketoriented and trade-oriented character over the longer term.

49. The relevant features of the pre-crisis economy included Indonesia's decades-long experience with a freely convertible currency and open capital account; the steadily increasing role of the private sector in the economy, which become dominant in the mid-1990's after deregulation in the 1980s; and the central role of exports as the engine for growth, which led to growing integration with the world economy and acceptance of trade-enhancing international agreements and substantial foreign investment. Those features suggested that Indonesia would remain private market oriented, open to foreign capital (though perhaps with new strings attached), and broadly internationalist.

50. However, there were unresolved issues that could affect the shape of the new economy and the role of foreign businesses in it. There was an ongoing debate about what kind of market-based system was appropriate in Indonesia. There were calls for a more inclusive system with an increasing role for small and medium enterprises rather than a small number of dominant conglomerates, but questions remained about how this could be achieved fairly.

51. Related to this debate was the discussion of the proper role of foreign businesses in Indonesia. The GOI intended to privatize major state-owned enterprises for economic efficiency, but various parties were uncomfortable with sales of such national enterprises to foreign companies. This discomfort was also reflected in concern that Indonesian banks and business would be sold to foreign investors at fire-sale prices.

52. Another unresolved issue was the decision-making structure that would emerge as democratic institutions gained firmer footing. The Soeharto-era structure, where all roads led to the president, was gone, but it was not yet clear what would take its place.

53. In general, the growing public pressure for a more transparent, accountable government and economic structure was likely to lead to an economy that played more to the strengths of U.S. business practices.

Table 11. Chronology of Indonesia's IMF Program

* Expected disbursement
Source: IMF documents on homepage: www.imf.org

Table 12. General Economic and Trade Statistics

Appendix A: Country Data

Population in 1999: 201 million (projection based on 1990 census)
Population growth rate:
Religions: 1.7 %/year (avg. for 1990-97) Islam, Hinduism, Buddhism, Christianity, Animism
Government System: Transitioning to Democracy
Languages: Indonesian, English, and Regional Languages
Work-week: Monday - Friday

Appendix B: Domestic Economy

Appendix C: Trade (USD billions)

* The forecast for FY1999/2000 (April-March) in the July 1999 GOI supplementary memorandum to the IMF is real GDP growth of positive 1.5 to 2.5 percent.
** Indonesia does not have reliable unemployment data, in part because of the large informal workforce.

note 1: 1999 figure is Jan-May, GOI statistics.
note 2: 1999 figure is Jan-April, USDOC statistics.
Sources: Indonesian Central Bureau of Statistics, Bank Indonesia, Ministry of Finance, World Bank, U.S. Department of Commerce (USDOC).

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