BANKINDONESIA

REPORT FOR THE FINANCIAL YEAR 1990/91

BANK INDONESIA

Head Office:Head Office:Head Office:Head Office:Head Office:

JAKARTA

Representatives:Representatives:Representatives:Representatives:Representatives:

KUALA LUMPUR,LONDON,

NEW YORK,SINGAPORE,

TOKYO

Branch Offices:Branch Offices:Branch Offices:Branch Offices:Branch Offices:

AMBON, BALIKPAPAN, BANDA ACEH,BANDAR LAMPUNG, BANDUNG,

BANJARMASIN, BENGKULU, CIREBON,DENPASAR, DILI, JAMBI, JAYAPURA, JEMBER,

KEDIRI, KENDARI, KUPANG, LHOKSEUMAWE,MALANG, MANADO, MATARAM, MEDAN, PADANG,

PADANG SIDEMPUAN, PALEMBANG, PALU, PEKANBARU,PEMATANG SIANTAR, PONTIANAK, PURWOKERTO, SAMARINDA,

SAMPIT, SEMARANG, SIBOLGA, SOLO, SURABAYA,TASIKMALAYA, TEGAL, TERNATE, UJUNG PANDANG, YOGYAKARTA

Position as per end of March 1991

ISSN 0376 - 4303ISSN 0376 - 4303ISSN 0376 - 4303ISSN 0376 - 4303ISSN 0376 - 4303

BANK INDONESIABANK INDONESIABANK INDONESIABANK INDONESIABANK INDONESIAGOVERNMENT COMMISSIONER AND BOARD OF DIRECTORSGOVERNMENT COMMISSIONER AND BOARD OF DIRECTORSGOVERNMENT COMMISSIONER AND BOARD OF DIRECTORSGOVERNMENT COMMISSIONER AND BOARD OF DIRECTORSGOVERNMENT COMMISSIONER AND BOARD OF DIRECTORS

Prof. Dr. Adrianus MooyGovernor

Oskar Surjaatmadja, MA. SC.Acting Government Commissioner

BinhadiManaging Director

Sujitno SiswowidagdoManaging Director

T.M. Sjakur MachmudManaging Director

R. RachmadManaging Director

HendrobudiyantoManaging Director

Dr. Syahril SabirinManaging Director

Dr. Hasudungan TampubolonManaging Director

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NOTES, SYMBOLS, AND SOURCE OF DANOTES, SYMBOLS, AND SOURCE OF DANOTES, SYMBOLS, AND SOURCE OF DANOTES, SYMBOLS, AND SOURCE OF DANOTES, SYMBOLS, AND SOURCE OF DATTTTTAAAAA

r Revised figures.

* Provisional figure;

* * Incomplete figures (i.e. compiled from incomplete data).

. . . Data not yet available.

-- Nil or less than the last digit.

X Break in comparability before and after the symbol.

$ United States dollar.

Source of data: Bank Indonesia, unless mentioned othenvise.

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This annual report on the state of the In-donesian economy in fiscal year 1990/91 isprepared by Bank Indonesia in its capacityas the country’s monetary authority. The re-port discusses economic developments in thesecond year of the Fifth Five Year Develop-ment Plan, the last stage of the first long-termdevelopment plan. In this phase, the basicstructure for achieving a just and prosperoussociety based on PANCASILA has beenstrengthened continuously as stipulated bythe State Guidelines (GBHN) of 1988. Tak-ing into consideration the challenges, oppor-tunities, and constraints in the coming year,the report also discusses the nearterm out-look of Indonesian economy in 1991/92.

This report introduces modifications con-cerning coverage and sequencing of topicsfor discussion with a view to providing a morecomprehensive coverage of the relevant is-sues. Monetary policy and developments re-main the focus of the discussion. This reportintroduces discussion on a new topic namelybase money. A new separate chapter is de-voted to a discussion of money and capitalmarkets in view of their increasing impor-tance to the Indonesian economy. Some top-ics, including domestic production and in-ternational financial institutions, have beenstreamlined while others -- investment, popu-lation, and cooperatives -- are incorporatedinto various chapters of this report. Finally,this report features a special topic dealingwith the February 28, 1991 Policy Package.

The Indonesian economy in 1990/91faced major challenges especially in dealingwith inflationary and balance of paymentspressures, as well as foreign exchange specu-lation against the rupiah. Because of theopenness of the economy, Indonesia was ad-versely affected by developments in the worldeconomy which went through a slowdown ofgrowth in output and trade partly due to theGulf crisis. Protracted trade negotiations un-der the Uruguay Round have dimmed theprospect of a successful conclusion. At thesame time, the spectacular growth of the In-donesian banking sector has provided a chal-lenge to policy making in promoting a soundand efficient banking system.

Faced with these challenges, the Govern-ment responded in the timely adoption ofprudential measures, including the PolicyPackage of February 28, 1991. This pack-age represents a finetuning of policies de-signed to promote sound banking practicesin the aftermath of the major deregulation ofthe financial and banking sectors. In addi-tion, the Government also continued effortsto enhance consistency of economic policies,through better coordination of policymakingin the monetary, fiscal, and real sectors.

The favorable impacts of the policies werereflected in the 1990 economic performancefeaturing a relatively high rate of economicgrowth, a tolerable rate of inflation, and asurplus in the overall balance of payments.

PREPPREPPREPPREPPREPACEACEACEACEACE

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Performance was also satisfactory in otherareas as reflected in a better diversificationof the economic structure and more equitabledistribution of the benefits of the develop-ment. Against this background of successfuladjustment over the past several years, newchallenges also emerge. The year 1991/92continues to pose challenges which requirevigorous and coordinated efforts to be under-taken by all parties concerned, includingbusiness community and the public.

Finally, I hope the information containedin this report will be useful to all of us. I also

wish to express my sincere gratitude to col-leagues in other government agencies andinstitutions for their excellent cooperationwhich made the preparation of this reportpossible.

Jakarta, October 1991

Prof. Dr. Adrianus MooyGovernor of Bank Indonesia

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I. INDONESIAI. INDONESIAI. INDONESIAI. INDONESIAI. INDONESIA’S ECONOMIC DEVELOPMENTS IN 1990/91’S ECONOMIC DEVELOPMENTS IN 1990/91’S ECONOMIC DEVELOPMENTS IN 1990/91’S ECONOMIC DEVELOPMENTS IN 1990/91’S ECONOMIC DEVELOPMENTS IN 1990/91

AND OUTLOOK FOR 1991/92AND OUTLOOK FOR 1991/92AND OUTLOOK FOR 1991/92AND OUTLOOK FOR 1991/92AND OUTLOOK FOR 1991/92

A .A .A .A .A . General RemarksGeneral RemarksGeneral RemarksGeneral RemarksGeneral Remarks

The policies adopted by the Government inthe past few years were in line with the StateGuidelines (GBHN) aimed at improving thewelfare of the people more equitably. To attainthis objective, the Government has increasinglysought to promote the participation of thebusiness community and the general public indevelopment activities. Specifically, theGovernment continued to foster the developmentof a strong business sector -- comprising publicenterprises, cooperatives, and private enterprises-- capable of stimulating economic growth,promoting equitable development and itsbenefits, and expanding employmentopportunities.

The series of policies introduced by theGovernment covers all areas of economyincluding monetary and financial, fiscal, trade,and investment. In the monetary andmonetary andmonetary andmonetary andmonetary andfinancial area, financial area, financial area, financial area, financial area, the Government continued toadopt various adjustment policies mainlydesigned to promote the effectiveness of monetarypolicy as well as to encourage a sound,competitive, and efficient financial and bankingsector. In the area of fiscal, area of fiscal, area of fiscal, area of fiscal, area of fiscal, the major policyincluded tax reform which was subsequentlyfollowed by improvements in tax administrationso as to increase domestic revenues. In the areaareaareaareaareaof trade, of trade, of trade, of trade, of trade, various barriers were removed instages while continuing to promote thedevelopment of domestic industries and toprovide incentives for non-oil/gas industries,especially export oriented industries. In the areaareaareaareaareaof investment, of investment, of investment, of investment, of investment, the policy has been directedtoward creating a conducive business climate

and providing a greater opportunity to the privatesector --including those under the DomesticInvestment (PMDN) and Foreign DirectInvestment (PMA) schemes -- intended, amongothers, to promote export-oriented industries.With regard to regional development, efforts toaccelerate development in eastern part ofIndonesia were made by the introduction ofvarious facilities designed to encourageinvestment in that area, enter alia, by providingconcessionary treatment on tax and financing.

Amid the unfavorable world economicdevelopments, the Indonesian economyIndonesian economyIndonesian economyIndonesian economyIndonesian economyappeared to have performed favorably in the pastfew years. It was reflected, inter alia, in arelatively high economic growth associated witha moderate rate of inflation, and a sustainablebalance of payments position. Thesedevelopments were mainly supported byimprovements in the structures of production,export, and government revenues.

The strong economic growth in the past fewyears was mainly stimulated by a surge in manu-facturing output that followed rapid growth ofprivate sector investment. Along with the higheconomic growth, the birth rate was controlledat a relatively low rate; hence, per capita in-come increased.

In the past few years, the banking industryin Indonesia, in responding to the policypackage of October 1988, showed rapid growthas reflected in the increase in the number ofbanks and the expansion of banking networksand services. In line with this progress, therewas a commensurate increase in savings

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mobilization which became available forfinancing productive sectors.

B .B .B .B .B . The Policy Stance and EconomicThe Policy Stance and EconomicThe Policy Stance and EconomicThe Policy Stance and EconomicThe Policy Stance and Economic

Developments in 1990/91Developments in 1990/91Developments in 1990/91Developments in 1990/91Developments in 1990/91

During 1990/91, Indonesia’s economy wasconfronted with pressures on the balance ofpayments and domestic prices, foreign exchangespeculation against the rupiah and increasingconstraints on infrastructure. At the same time,the longer-term problems which needed to beaddressed included the equitable development andits benefits, such as equitable interregionaldevelopment, especially in Indonesia’s easternregion. On the external side, the Indonesianeconomy was adversely affected by severaldevelopments, including a slowdown in theeconomic growth of the industrial countries whichresulted in a deceleration in the growth of worldtrade and deterioration of the prices of variousprimary commodities on world market. The highlevel of interest rates in most industrial countriesand the continued protectionist measures by theindustrial countries as well as the on-going processof economic reform in the Eastern Europe alsoadversely affected Indonesia’s economicperformance; The Gulf crisis had a mixed impacton Indonesia’s economy. On one hand, it broughtabout increased oil revenues. On the other hand,it contributed to a moderation in the growth ofnon-oil/gas exports and a heightened speculativeactivities against the rupiah in foreign exchangemarkets.

As a result of the series of policies adoptedby the Government, during the reporting yearIndonesia’s economy sustained a high growthgrowthgrowthgrowthgrowthrate rate rate rate rate of 7.4%, compared with 7.5% in thepreceding year. Given the extent of the slowdownin the world economy, Indonesia’s performance

was quite satisfactory. The sustained growth in1990 was mainly bolstered by robust domesticdemand, both investment and consumption.Gross domestic capital formation grew by 16.2%in 1990 as against 13.4% in the preceding year.Domestic consumption rose by 8.8% as comparedwith 5.1% in 1989. On the other hand, theexternal sector contributed negatively to thegrowth of the GDP. It is noted, however, sincemuch of this impact was accounted for by asubstantial increase in imports of capital andraw material, it would in due course contributefavorably to Indonesia’s economy. By sector, thehigh economic growth in 1990 was mainlyattributable to the strong performance of themanufacturing sector as well as trade, hotel, andrestaurant sector. The agricultural sector alsocontinued to provide a significant contributionto the GDP.

The rise in the inflation rate inflation rate inflation rate inflation rate inflation rate in 1990 wasdue to higher production cost following theincreases in the domestic prices of fuel oils,transportation fares, and cement. There were alsosigns of capacity constraints affecting certainproducts, such as cement and certain commercialvehicles. Furthermore, buoyant domesticdemand also contributed to the rise in theinflation rate. The strong domestic demand inthe past few years resulted mainly from a surgein investment activities due to a more favorableinvestment climate following the adoption of aseries of deregulation measures by theGovernment. In addition, an increase in domesticliquidity during 1989/90 facilitated borrowingsto finance investment activities. Thisdevelopment in turn induced high growth inimports, especially capital goods and rawmaterials, which, coupled with the decelerationin the growth of non-oil/gas exports brought aboutan increasing pressure on the current account.

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Efforts to control the inflation rate duringthe reporting year were carried out by enhancingcoordination of monetary, fiscal, and otherpolicies. As regards monetary policy, theGovernment slowed down the growth of moneysupply by conducting open market operationthrough transactions in Bank Indonesiacertificates (SBIs) and money market securities(SBPUs) and phasing out Bank Indonesialiquidity credit gradually in accordance with thePolicy Package of January 1990. The efforts totighten money supply were also reflected in anincrease in the interest rate on SBIs. The signsof intensifying speculation on foreign exchangewhich started to emerge toward the end of thereporting year prompted the Government to speedup the tightening of money supply. This wascarried out by converting a portion of the fundsof a number of public enterprises deposited atstate and private banks to SBIs, although theeffect of this measure on liquidity was partlyoffset by Bank Indonesia’s purchase of SBPUsat varying maturities. It should be noted thatthis activity was basically intended to promotethe development of a two-way monetary controland gradually encouraged the development ofthe secondary market of SBIs and SBPUs. Withrespect to fiscal policy, since October 1990 theGovernment imposed a ceiling for each TreasuryOffice’s deposits maintained with banks andrequired banks to transfer all tax receiptspromptly to Bank Indonesia. This reflected animprovement in the coordination betweenmonetary and fiscal policies so as to maintainmonetary stability. Through those policies,combined with efforts to expedite the flow ofgoods, the inflation rate was contained at a levelof 9.11%.

This stance of monetary policy monetary policy monetary policy monetary policy monetary policy was alsoreflected in the deceleration in the growth of

various monetary aggregates. Reserve moneygrew by 5.4% as against 18.6% in the precedingyear. The growth of narrow money (M1) droppedfrom 47.6% in 1989/90 to 6.4% in the reportingyear. The growth of broad money (M2) alsomoderated from 45.% in 1989/90 to 26.0% inthe reporting year. Along with thesedevelopments, interest rate rose markedly,thereby inducing the shifting of deposits fromdemand deposits to time and savings deposits.

Domestic interest rates interest rates interest rates interest rates interest rates showed a risingtendency since mid 1990. This increase wasclosely related to the rapid growth in investmentand economic activities which stimulated theincrease in the demand for credit. Meanwhile,the growth of domestic liquidity started to leveloff as a result of the monetary tightening whichwas aimed at containing inflation. Interest ratesrose further toward the end of the reporting yeardue to further tightening of liquidity resultingfrom the shifting of a portion of bank deposits ofpublic enterprises to SBIs which was intendedto stem speculation against the rupiah in theforeign exchange markets.

The rise in interest rates had encouragedbanks to turn to off-shore borrowings to off-shore borrowings to off-shore borrowings to off-shore borrowings to off-shore borrowings as analternative means of financing their domesticlending activities either in rupiah or foreigncurrency. This was facilitated by the removal ofceiling on banks’ off-shore borrowings in 1989in spite of the existence of a regulation governingnet open foreign exchange position in 1989. Asa consequence, banks’ off-shore borrowings rosesubstantially during the reporting year. Whilethis had the effect of increasing net-privatecapital inflows, it reduced the effectiveness ofmonetary policy and had the longer-termconsequence of increasing the stock of externaldebt.

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In the area of fiscal policyfiscal policyfiscal policyfiscal policyfiscal policy, , , , , the Governmentintensified efforts to raise domestic revenues andto allocate expenditures effectively andefficiently. In line with its cautious policy, theGovernment sterilized the windfall revenue fromoil/gas in the form of development budgetreserves. This reflected the Government effortsto improve the coordination between monetaryand fiscal policies designed to support theattainment of sustained economic growth whilestriving to achieve balance in its internal andexternal accounts. In 1990/91, governmentrevenues reached a level of Rp49.451 trillionwhich was 23.3% higher than that of thepreceding year. The increase in governmentrevenues originated from higher oil/gas andnon-oil/gas revenues. As was the case in thepreceding year, non-oil/gas revenues was higherthan oil/gas revenues. The increase in non-oil/gas revenues reflected the Government’sachievement in raising tax revenues, while theincrease in oil/gas revenues was mainly broughtabout by the buoyant oil prices in the worldmarket. The high revenues contributed to higherexpenditures, both routine and development.During the reporting year, routine and developmentexpenditures rose respectively by 23.3% and40.6% from the preceding year’s outturn.

The overall balance of payments balance of payments balance of payments balance of payments balance of payments for theyear recorded a surplus in spite of a markedincrease in current account deficit. The wideningcurrent account deficit was largely attributableto a deterioration in the trade balance - - from asurplus of $6,456 million in 1989190 to $5,155million in 1990/91 - - brought about by anacceleration of import growth, while exportsdecelerated. Much of the increase in imports,consisting of capital goods and raw material, wasattributable to the direct impact of theadjustment policies aimed at encouraging

production and investment. The deceleration inthe growth of exports occurred in spite of a surgein oil/gas exports; lower growth rate of non-oil/gas exports resulted from the sluggishness inworld trade and a deterioration in the prices ofa number of commodities. Also, a bouyantdomestic demand had the effect of reducingexport availability for a number of products. Therise in oil/gas exports was due mainly to a sharpincrease in world oil prices following the Gulfcrisis. The deficit in the services accountwidened during 1990/91 as a result of a rise ininterest payments on external debt and higherfreight charges on imports. Hence, the currentaccount deficit widened from $1,599 million in1989/90 to $3,741 million in 1990/91.

During the reporting year, the capital accountsurplus showed a substantial increase, reflectinglarger inflows of net private capital -- of $575million to $5,856 million -- which more thanoffset a decline in net official inflows from $1,830million to $924 million. The increase in netprivate capital inflows, which followed the removalof ceiling on banks’ offshore borrowings in 1989,reflected both the large differential betweendomestic and foreign interest rates, and greaterforeign confidence in the Indonesian economy.

The comparison of Indonesia’smacroeconomic performance between 1989 and1990 involving economic growth, inflation rate,ratio of current account deficit to GDP andunemployment is presented in Chart I. Thesmaller shaded area for 1990 in the chart depictsa less favorable performance compared with thatof 1989. This is reflected mainly in the widercurrent account deficit and higher inflation ratedue, inter alia, to a surge in private investment,while economic growth and unemployment ratedo not show a significant difference. Chart I also

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CHART 1INDONESIAN ECONOMY 1989-1990

illustrates a comparison of the economicperformance between the years 1989 and 1990and the targets set during the Fifth Five-YearDevelopment Plan (Repelita V).

The rapid growth of the banking sector andthe tendency for globalization of banking activityhave created a need for increased professionalbanking personnel, upgrading of bankingtechniques and operations, and a moreresponsible mental attitude in securing publicinterest. In order to derive the benefit from theemerging opportunities while simultaneouslyimproving their competitiveness and soundness,it is necessary that banks in Indonesia complywith the international standards. For thispurpose, through stages banks in Indonesia arerequired to meet the capital adequacy

requirement set by the Bank for InternationalSettlements (BIS). In view of these developments,the Government introduced the Policy Packageof February 1991 containing five elements,namely licensing, ownership, and management;guidelines for prudential banking practices;reporting system; procedures to assess thesoundness of bank operations and to imposesanctions in case of violation; and supportingelements for promoting banking business. Asregards the capital adequacy requirement, it isstipulated that banks shall meet the minimumrequirement of 5% by the end of 1992, 7% by theend of March 1993, and 8% by the end of 1993.

Along with the efforts to promote savingsmobilization by the banking system, theGovernment also continued to encourage

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alternative ways to finance development throughequity participation by the public in the stockmarket. This process was aided by thePresidential Decree No. 53 of 1990 whichoutlines rules for protecting investors’ interestsand creating an orderly, open, and efficientmarket. Under this decree, the private sector isentrusted to operate a stock exchange.

C. Economic Outlook for 1991/92C. Economic Outlook for 1991/92C. Economic Outlook for 1991/92C. Economic Outlook for 1991/92C. Economic Outlook for 1991/92

In 1991/92, the Indonesian economy isencountering a host of unfavorable externaldevelopments. The world economy has not yetrecovered from the slowdown which has affectedmost major industrial countries. As aconsequence, the growth of world trade volumeis estimated to remain low and the prices ofnon-oil/gas primary commodities weak.Uncertainties still cloud the oil price outlookwith lower prices than in 1990/91. Protectionistmeasures by the major industrial countriespersist and the outcomes of the multilateral tradenegotiations under the Uruguay Round is stilluncertain. Protectionism could even intensify asa result of the establishment of economic blocsin various regions and the growing tendency ofbilateralism. At the same time, given the limitedsupply of aid resources, the flow of funds todeveloping countries, including Indonesia, couldbe curtailed because of increased aid foreconomic reforms in Eastern Europe. On theinternal side, Indonesia is also confronted withvarious challenges and constraints, especially thelimited expansion of employment opportunities,equitable income distribution, the limitedinfrastructure, and drought.

In 1991/92, the implementation of prudentmonetary and fiscal policies supported by policiesin the real sector aims at containing inflationinflationinflationinflationinflation

and cushioning pressures on the balance ofpayments. The factors exerting pressure ondomestic prices in 1991/92 include the rise inthe prices of domestic fuel oils and particularpublic services, as well as supply constraints ofboth infrastructure and production capacity forcertain products. Moreover, buoyant domesticdemand stimulated by acceleration of investmentactivity and by the rise in civil servant salariesare also the contributing factors. As a corollary,the Government continues to promote non-oil/gas exports and simultaneously sharpens theproject priority, especially those with high importcontents.

The pursuit of prudent monetary policy isexpected to slow down the growth of broad money(M2). The moderation in the expansion ofbanking would contribute to the deceleration ofM2, as would the implementation of the capitaladequacy ratio as stipulated in the PolicyPackage of February 1991. The package isdesigned to encourage banks to consolidate theiroperation and to be more cautious in their creditextension. Meanwhile, narrow money (M1) isexpected to grow more rapidly in line with theincreasing need for demand deposits to financestrong economic activities in 1991/92.

The high interest rates interest rates interest rates interest rates interest rates prevailingespecially toward the end of the reporting yearwere mainly affected by the undue expectationon the sharp depreciation of the rupiah exchangerate which prompted the Government to convertthe deposits of a number of public enterprisesat banks to SBIs. Following the revival ofconfidence in the rupiah, interest rate is expectedto be in a downward trend during 1991/92.

In 1991/92, the current account deficit, as aratio to GDP, is expected to be slightly higher than

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that of the preceding year. This is mainly due tothe continued growth in imports albeit at a lowerrate than that in 1990/91 and the declining trendof oil/gas prices. On the other hand, the growth ofnon-oil/gas exports, which slowed down in1990/1991, is expected to rebound in 1991/92reflecting continued efforts to improvecompetitiveness and expand manufacturingthrough investments. In order to contain therapid expansion of imports and alleviatepressures on the balance of payments, theGovernment has maintained a prudent monetaryand fiscal policies, including the sharpening ofpriority involving large scale projects with highimport contents.

During 1991/92, net capital inflows areprojected to be lower than the inflows recordedin the previous year. However, the inflows are

estimated to surpass the deficit in the currentaccount, thereby leaving the overall balance ina small surplus.

By way of summary, during 1991/92 theIndonesian economy is projected to record aslightly lower growth rate than in the precedingyear. The economic growth economic growth economic growth economic growth economic growth in 1991/92 isexpected to benefit from strong domestic demand,and, unlike in 1990/91, foreign demand wouldalso provide a positive contribution to growth in1991/92. During the year, monetary policy isexpected to remain cautious, thereby alleviatingpressure on domestic prices. At the same time,interest rates could eventually tend to come downand the balance of payments would remainsustainable. These developments are based onthe continued pursuance of prudentmacroeconomic policy.

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II. WORLD ECONOMIC DEVELOPMENTS ANDII. WORLD ECONOMIC DEVELOPMENTS ANDII. WORLD ECONOMIC DEVELOPMENTS ANDII. WORLD ECONOMIC DEVELOPMENTS ANDII. WORLD ECONOMIC DEVELOPMENTS AND

INTERNAINTERNAINTERNAINTERNAINTERNATIONAL COOPERATIONAL COOPERATIONAL COOPERATIONAL COOPERATIONAL COOPERATIONTIONTIONTIONTION

A .A .A .A .A . WWWWWorld Economic Developmentsorld Economic Developmentsorld Economic Developmentsorld Economic Developmentsorld Economic Developments

In 1990, the world economic situationturned out to be less favorable than expected.This was reflected in a slowdown of economicgrowth, an acceleration in inflation rate, adecline in world trade volume and a high levelof interest rates. The world economic growth inthe preceding year slowed down and it wasfurther aggravated by the Gulf crisis and theshort-run impact of the unification of Germanyand the immediate impact of the economicrestructuring in the Eastern Europe and theSoviet Union. While both developed anddeveloping countries suffered, developingcountries were additionally affected by thedeterioration of their primary commodity exportprices and the intensification of protectionistmeasures, which aggravated their external debtsituation.

This slowdown in world economic growthwas recorded in developed and developingcountries in the past two years, except someindustrial countries, especially Japan andGermany, and a number of developing countriesin Asia. The slowdown in the growth rate of mostindustrial countries was reflected in the marginalexpansion of employment opportunities; hence,unemployment remained virtually unchanged.

In 1990, a number of major industrialcountries adopted tight monetary policy stanceintended to contain inflationary pressure. Thefiscal policy stance was generally neutral andin some cases restrictive. While those policiesassisted in containing inflationary pressure, theyalso contributed to low economic growth.

The Gulf crisis, which started in August1990, has the temporary effect of boosting oilprices. Although it was short-lived, the high oilprice brought about an adverse impact on theeconomic performance of the industrial countriesin terms of intensifying pressure on inflation anda deceleration in the economic growth rate inthe last quarter of 1990. The Gulf crisis hadparticularly adverse effects on the economics ofseveral developing countries highly dependenton the countries in the Gulf area for their foreignexchange earnings. Furthermore, the process ofeconomic restructuring in the centrally plannedeconomies of Eastern Europe and the SovietUnion to market economies had the short-runeffect of slowing down economic activity inthese countries during transition.

As a consequence of all the above factors,the growth of world trade volume in 1990declined to 3.9% compared to 7.1% in thepreceding year. Nevertheless, externalimbalances among the major industrial countries,especially between the United States on onehand, and Germany and Japan on the other hand,narrowed. Prices of most primary commoditiesweakened, bringing about a deterioration in theterms of trade of developing countries. The neteffect was that the deficit of the current accountof developing countries widened and a numberof developing countries were faced with heavyexternal debt burden and lower capital inflows.

1 .1 .1 .1 .1 . Industrial countriesIndustrial countriesIndustrial countriesIndustrial countriesIndustrial countries

The economic growth of the OECD countriesdecelerated from 3.3% in 1989 to 2.6% in 1990(Table II.1) mainly reflecting a slowdown of

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10

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the economic growth of the seven majorindustrial countries from 3.3% to 2.6%. Amongthese countries, Japan attained the highestgrowth (5.6%) which was mainly buoyed bystrong domestic demand resulting from anexpansionary stance of fiscal policy. The lowestgrowth was recorded in the United Kingdom(0.6%) attributable to weak domestic demand.

The inflation rate in industrial countriesincreased somewhat from 4.4% in 1989 to 4.6%in 1990. This was also attributable to the jumpin oil price. During the same period, non-oilprimary commodity prices declined, therebymoderating the influence on inflation. Amongthe major industrial countries, the highestinflation rate was recorded in Italy (6.2%),whereas the lowest was in Japan (2.4%).

Despite the slowdown in economic growth,unemployment rate in the industrial countriesremained virtually unchanged, i.e. 6.2% in 1990as against 6.4% in the preceding year. The slightdecline in the unemployment rate resulted fromthe lower growth of the labor force and theexpansion of employment opportunities in someindustrial countries, notably Japan and someEuropean countries. Among the seven majorindustrial countries, the highest unemploymentrate was recorded in Italy (11.0%), whereas thelowest was in Japan (2.1%).

As earlier mentioned, in 1990 the externalimbalances among the three major industrialcountries, namely the United States, Japan andGermany narrowed (Table II.2). The currentaccount deficit of the United States declinedfollowing the weakening of domestic demand andthe improvement in export competitivenessstemming from depreciation of the US dollar.The current account surplus of Japan narrowed

on account of strong domestic demand and thejump in oil price. The surplus in the currentaccount of Germany also narrowed followingthe appreciation of German mark and theunification of Germany which, in the short run,diverted resources to the domestic market andraised the demand for imports.

The economic growth of the United StatesUnited StatesUnited StatesUnited StatesUnited Statesdecelerated to only 0.9% in 1990 compared with2.5% in the preceding year. This decelerationwas accounted for by the weakening domesticand external demand. The weakening domesticdemand stemmed from lower growth of privateconsumption and investment as a consequenceof tight monetary policy and the contraction inthe growth of bank credits. In addition, the Gulfcrisis had an adverse impact on domestic demanddue mainly to high oil price. The slowdown inthe growth of external demand was mainlyattributable to the decline of exports.

The inflation rate of the United States rosefrom 4.5% in 1989 to 5.0% in 1990 due mainlyto the rise in oil price and an increase in importduties. Meanwhile, with the economic slowdown,the unemployment rate rose from 5.3% to 5.5%.

On the international trade front, the tradeaccount deficit narrowed from $114.9 billionin 1989 to $108.7 billion in 1990 due to thesmaller increase in imports relative to that ofexports. The current account deficit alsoimproved from $110.0 billion to $99.3 billion,which was brought about by an improvement inthe services account surplus from $4.9 billionto $9.4 billion in 1990.

The economic growth of Japan Japan Japan Japan Japan acceleratedfrom 4.7% in 1989 to 5.6% in 1990 due mainlyto strong domestic demand buoyed by robust

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growth of investment, especially in housing andgovernment sectors. The latter stemmed fromincreased spending for social infrastructure. Theslower growth of foreign demand was reflectedin the lower growth in export volumes relativeto that of imports.

The Japan inflation rate stood at 2.4% in1990 compared to 1.8% in the preceding year.The higher rate was due mainly to rises in wagerate and consumer goods prices. Theunemployment rate declined slightly from 2.3%in 1989 to 2.1% in 1990 owing to a higherexpansion of employment opportunities.

The surplus in the trade account narrowedto $63.9 billion in 1990 from $76.9 billion inthe preceding year. This was due to a smallerincrease in exports ($10.6 billion) relative tothat of imports ($23.6 billion). The smallincrease in exports was due to a slowdown ofexternal demand and a deterioration in thecompetitiveness of Japanese products in theinternational market following the appreciationof Japanese yen. As mentioned earlier, the steadyincrease in import values was primarily buoyedby the robust domestic demand and the jump inoil price. With the widening services accountdeficit from $19.7 billion to $28.1 billion, thecurrent account surplus preceding year.

As was the case with Japan, the FederalFederalFederalFederalFederalRepublic of Germany Republic of Germany Republic of Germany Republic of Germany Republic of Germany also recorded a highergrowth rate of 4.5% in 1990, compared with3.8% in 1989. This growth stemmed from strongdomestic demand despite the slackening growthin external demand. The strong growth ofdomestic demand was reflected in the highgrowth of private consumption, governmentconsumption, and gross fixed investment. Muchof the growth in the private consumption was

accounted for by the cut of value added tax anda rise in wage rate, whereas the faster growth ingross fixed investment was closely related to themarket prospects in East Germany and EasternEurope. The lower growth in external demandwas reflected in the decline in the growth ofexport volume, whereas imports increased,driven by strong domestic demand.

The German inflation rate decelerated from3.0% in 1989 to 2.5% in 1990. The decelerationwas attributable to the appreciation of Germanmark which helped dampen the inflationarypressure of the rise in oil price. Reflectingbuoyant economic activity, the unemploymentrate declined from 5.6% to 5.1%.

The surplus in the trade account of Germanynarrowed from $77.9 billion in 1989 to $72.8billion in 1990. Taking into account the increasein the services account deficit from $20.7 billionin 1989 to $24.9 billion, the current accountsurplus declined by $9.3 billion to $47.9 billionin 1990.

The economic growth of the United KingdomUnited KingdomUnited KingdomUnited KingdomUnited Kingdomslowed down from 1.9% in 1989 to 0.6% in 1990.This slowdown was brought about by a moderationin the growth of domestic demand in spite of thehigher growth of external demand. The moderationin the growth of domestic demand was largelyaccounted for by the decline in investment,especially private residential and nonresidential,and the deceleration in the growth of privateconsumption. The higher growth in externaldemand was reflected in the higher growth ofexport volume of goods and services relative tothat of imports.

The inflation rate declined from 5.6% in1989 to 4.7% in 1990 stemming mainly from

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the adoption of tight monetary policy and theslackened growth of domestic demand. Theunemployment rate declined from 6.2% in 1989to 5.5% in 1990 as a result of the largerexpansion of employment creation relative tothe growth of the labor force.

The deficit in the trade account narrowedfrom $39.3 billion in 1989 to $31.8 billion in1990 with the increase in exports mainlyoriginating from higher oil price. With thewidening services account deficit from $6.7billion to $9.1 billion, the current accountdeficit narrowed from $32.6 billion in 1989 to$22.7 billion in 1990.

2 .2 .2 .2 .2 . Developing countriesDeveloping countriesDeveloping countriesDeveloping countriesDeveloping countries

In 1990, developing countries were facedwith various internal as well as externalproblems. The internal problems included, interalia, high inflation rate, a heavy burden ofexternal debt, economic restructuring in theEastern Europe and the Soviet Union, and theGulf crisis. The external factors hampering theeconomic performance of the developingcountries included, among others, the high levelof interest rate and the weakening of importdemand from the industrial countries.

This external environment contributed to adeceleration in the economic growth of thedeveloping countries from 3.1% in 1989 to1.3% in 1990 with the most pronounced -- asindicated by a negative growth rate -- occurringin Europe, Middle East, and WesternHemisphere (Table II.1). By region, the highestgrowth rate was recorded in Asia (5.3%),whereas the lowest in Europe (-4.7%). The highgrowth rate in Asia stemmed mainly from therobust growth in foreign investment and exports.

The negative growth in Europe was attributableto the impact of economic restructuring duringtransition from socialist to a market based systemin Eastern Europe. The inflation rate of thedeveloping countries went up from 105.0% in1989 to 117.7% in 1990 which was mainlyinfluenced by the hyperinflation in Argentina,Brazil, and Peru.

The economic growth of oil exportingoil exportingoil exportingoil exportingoil exportingdeveloping countries developing countries developing countries developing countries developing countries slowed down from 3.2%in 1989 to 1.0% in 1990 owing mainly to theslowdown in the economic activities in theMiddle East. The inflation rate declined from19.6% to 16.5% in 1990 following themoderation in the inflation rates of Saudi Arabia,Venezuela, and Nigeria. The surplus in the tradeaccount widened by $27.6 billion reaching alevel of $78.4 billion in 1990. Hence, the currentaccount swung from a deficit of $6.4 billion in1989 to a surplus of $8.6 billion in spite of thesubstantial increase in the services accountdeficit from $57.2 billion to $69.8 billion.

In 1990, the economic growth of non-oilnon-oilnon-oilnon-oilnon-oilexporting developing countries exporting developing countries exporting developing countries exporting developing countries exporting developing countries deceleratedfrom 3.1% to 1.4%. Much of this decelerationwas accounted for by the deterioration in theprices of non-oil primary commodities, on whichexport dependence is still high, and the declinein import demand from the industrial countries.The inflation rate went up from 148.8% in 1989to 167.8% in 1990. The deficit in the tradeaccount widened from $6.7 billion in 1989 to,$23.6 billion in 1990 owing to a higher increasein imports relative to that of exports. Hence, thecurrent account deficit increased from $7.9billion in 1989 to $16.8 billion despite a sharpturnaround in the services account from a deficitof $1.2 billion in 1989 to a surplus of $6.8 billionin 1990.

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Despite the slowdown in the growth of worldeconomy, the newly-industrialized economiesnewly-industrialized economiesnewly-industrialized economiesnewly-industrialized economiesnewly-industrialized economies(NIEs) (NIEs) (NIEs) (NIEs) (NIEs) comprising Hong Kong, South Korea,Singapore, and Taiwan continued to sustain a highgrowth rate averaging 6.8% in 1990. This growthwas mainly attributable to higher- than-averagegrowth in South Korea (8.7%) due primarily to asurge in private consumption following the increasein wage rate and higher investment. Among theNIEs, Hong Kong recorded the lowest growth of2.3% which was mainly due to the slowdown inthe economic growth of the industrial countries,which are its main trading partners. Meanwhile,Taiwan and Singapore recorded lower growth,respectively 5.1% and 8.3% in 1990 as against7.6% and 9.2% in the preceding year.

The inflation rate of NIEs reached 7.5% in1990 as compared with 5.5% in 1989. Thehigher inflation rate was mainly driven up byrising production cost resulting from increasesin wages and higher oil prices. The trade accountsurplus declined from $18.4 billion to $7.5billion following slower growth of externaldemand, especially from the United States. With

a surplus of $5.4 billion in the services account,the surplus in the current account declined from$22.1 billion in 1989 to $12.9 billion in 1990.

3 .3 .3 .3 .3 . ASEAN countries (Association ofASEAN countries (Association ofASEAN countries (Association ofASEAN countries (Association ofASEAN countries (Association of

South-East Asian Nations)South-East Asian Nations)South-East Asian Nations)South-East Asian Nations)South-East Asian Nations)

The ASEAN ASEAN ASEAN ASEAN ASEAN economies continued to showan impressive performance in 1990 (Table II.3),in spite of the unfavorable performance of theindustrial countries and other developingcountries. Compared with other developingcountries in other regions, the ASEAN countriesattained the highest economic growth rate,averaging 7.5% in 1990, though lower than thatof the preceding year (8.6%). Among the ASEANcountries, Malaysia recorded the highest growth(10.0%) subsequently followed by Thailand(9.8%), Singapore (8.3%), and Indonesia (7.4%).Low economic growth was experienced by BruneiDarussalam (3.0%) and the Philippines (2.5%).

The high economic growth in ASEAN as agroup was mainly attributable to robust domesticdemand. Adjustment policies adopted by some

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ASEAN countries, namely Malaysia, Thailand,and Indonesia since 1980s were largelyresponsible for these favorable outcomes. Theadjustment policies had, inter alia, contributedto an improvement in the utilization of resourcesand the strong growth in the manufacturingsector. On the other hand, the deterioration inthe world prices of primary commodities in 1990had brought about sluggish growth of theagricultural sectors in Malaysia, Thailand, thePhilippines, and Indonesia.

With the exception of Malaysia whichcontinued to record higher growth, the economicgrowth of other ASEAN countries slowed down in1990 with the most pronounced being experiencedby the Philippines, from 5.6% to 2.5%. Much ofthe slowdown in the Philippines was accountedfor by the domestic political instability whichcomplicated the pursuit of sound adjustmentpolicies and by higher oil prices.

The average inflation rate of the ASEANcountries went up from 6.1% in 1989 to 8.0%in 1990. The highest inflation rate was recordedin the Philippines (12.7%), whereas the lowestwas in Brunei Darussalam (2.5%).

Compared with developing countries in otherregions, the inflation rate of the ASEANcountries was relatively low. As in the precedingyear, most ASEAN countries continued to followprudent monetary and fiscal policies to containthe inflationary pressures in 1990.

The higher inflation rate of the ASEANcountries in 1990 was attributable to the strongdomestic demand and an increase in productioncost. Capacity constraint in some sectors was acontributing factor. The increase in productioncost stemmed from the hike in oil price in the

second semester of 1990. In the case ofSingapore, the increase in The labor force didnot sufficiently meet the expansion in economicactivities which drove wage rate upward.

In the area of international trade, exports ofthe ASEAN countries (excluding BruneiDarussalam) rose from $118.6 billion in 1989to $136.3 billion in 1990 (Table II.4), whileimports rose from $116.2 to $140.0 billion.The higher imports reflected strong growth ininvestment in most of the ASEAN countries.Hence, the combined trade account deficitwidened from $2.4 billion in 1989 to $3.7 billionin 1990 and the current account deficit jumpedfrom $1.4 billion in 1989 to $11.2 billion in1990.

B. International Monetary DevelopmentsB. International Monetary DevelopmentsB. International Monetary DevelopmentsB. International Monetary DevelopmentsB. International Monetary Developments

In 1990, the international monetarydevelopments were characterized by theweakening US dollar against most other majorcurrencies, rising interest rate, continued heavydebt burden of developing countries, and themoderate growth of international liquidity.

The US dollar weakened especially in the thirdand fourth quarter of 1990, a development closelyrelated to the economic consequences of the Gulfcrisis which, among other things, had an upwardpressure on oil price. Another factor was the lowlevel of interest rate prevailing in the US comparedwith that in Japan and Germany in the last quarterof 1990. On the average, during 1990 the US dollardepreciated by 14.7% against French franc, 14.1%against German mark, 12.7% against Italian lira,and 5 0% against Japanese yen.

On average, long-term nominal interest rateof the major industrial countries rose from 8.1%

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in 1989 to 9.0% in 1990. This rise was affectedby the expectation of the need for funds whichexceeded the growth of savings. The expectationwas based on the need for funds to finance theunification of Germany and the process ofeconomic reform in the Soviet Union and EasternEurope. Furthermore, the excess demand forfunds was also closely related to the changingpattern of investment which was more orientedtoward high technology and capital intensiveinvestment.

The short-term nominal interest rate in themajor industrial countries went up from 8.7%in 1989 to 9.1% in 1990. The increase occurredin all countries except the United States andItaly which declined respectively from 8.1% and12.6% to a level of 7.5% and 12.1%. A markedincrease was recorded in Japan, from 5.4% to7.7% and the Federal Republic Germany from7.1% to 8.5%. For major industrial countriesthat experienced an increase in the interest rate,this was closely related to the adoption of tightmonetary policy stance designed to reducedomestic demand pressures. It is worth notingthat the decline in the interest rate in the UnitedStates was an effort on the part of the FederalReserve Board to stimulate a sluggish economicactivity which had become apparent in the secondsemester of 1990.

Developing countries, particularly thoseclassified as heavily indebted, were stillconfronted with the heavy debt burden owingpartly to the higher interest rates and thesubstantial amount of outstanding debt. Totaloutstanding debt increased from $1,244.8 billionin the end of 1989 to $1,459.5 billion by theend of December 1990 of which $509.2 billionaccounted for the total debt of the heavilyindebted countries. Nonetheless, because of the

rescheduling and -- for a number of heavilyindebted countries -- the increase in exportearning due to higher oil prices, the debt serviceratio (DSR) declined from 16.8% to 15.4% andthe ratio of total debt to total exports declinedfrom 130.6% to 126.5%.

International liquidity, measured on the basisof total world foreign exchange reserves, rose bySDR44.9 billion to reach a level of SDR668.9billion (equivalent to $907.6 billion at end of1990 exchange rates). The international liquidityof the industrial countries was up fromSDR410.1 billion to SDR441.9 billion ($599.6billion), sufficient to finance three months’imports. The increase was recorded in the UnitedStates and Italy, whereas the decline occurredin Japan and the United Kingdom. Theinternational liquidity of the developing countriesrose from SDR213.8 billion to SDR226.9 billion($307.9 billion). This was adequate to finance4.8 months’ imports. The increase ininternational liquidity was recorded in Asia (thelargest), followed by Western Hemisphere,Africa, and Europe. The international liquidityof oil exporting developing countries declinedby SDR0.3 billion to SDR44.1 billion as a resultof reductions in the oil exporting countries ofthe Middle East. Non-oil exporting developingcountries recorded an increase of SDR13.4billion reaching a level of SDR182.9 billion bythe end of 1990.

C. International Financial InstitutionsC. International Financial InstitutionsC. International Financial InstitutionsC. International Financial InstitutionsC. International Financial Institutions

Indonesia has been a member of variousfinancial institutions, including the InternationalMonetary Fund, World Bank group, AsianDevelopment Bank, and Islamic DevelopmentBank. Through this stance, Indonesia couldderive benefits in terms of economic and

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financial cooperation with other countries, aswell as the financial assistance to supporteconomic development in Indonesia.

At meetings in May and September 1990, theIMF IMF IMF IMF IMF recommended that the industrial countriesshould coordinate their policies in order to alleviateexternal imbalances among them and to restorethe growth momentum in a noninflationaryenvironment. The meetings also urged membercountries to move forward toward liberalization ofworld trade within the context of an early andsuccessful conclusion of the Uruguay Round. Inaddition to its usual support of members’adjustment efforts, the IMF provided technical andfinancial assistance to a number of East Europeancountries in support of their transition from centralplanning to a market economy.

In response to the economic consequencesarising from the Gulf crisis, the IMF adapted itspolicies with a view to assisting member countrieswhose balance of payments were directly orindirectly affected by the crisis. With this inmind the Compensatory Financing Facility (CFF)was amended, on a temporary basis, by makingit possible to provide assistance to financepayments difficulties arising from higher oilimport prices, as well those arising fromshortfalls in export earnings.

The amendment also stipulated the possibleinclusion of certain services transactions -- suchas insurance and freight -- in the calculation ofexport shortfalls. The provisions of other facilitieswere also modified with a view to makingresources available more promptly and, in somecases, in larger amounts to support countries’adjustment efforts to deal with the crisis.

With a view to enchancing the capacity of

the IMF to deal with future demands for financialassistance, the resolution for quota increase wasadopted in July 1990. The resolution alsoincludes an amendment of the IMF Articles ofAgreement designed to deal with the situationof members in arrears with their payments tothe IMF. The resolutions stipulate a 50% increase in quotas to SDR135.2 billion, which willbecome effective once a sufficient number ofcountries completed their approval procedures.

During the reporting year, theInternational Bank for ReconstructionInternational Bank for ReconstructionInternational Bank for ReconstructionInternational Bank for ReconstructionInternational Bank for Reconstructionand Development (IBRD) and Development (IBRD) and Development (IBRD) and Development (IBRD) and Development (IBRD) in cooperation withthe United Nation Development Program(UNDP), established the Global EnvironmentFacility (GEF) intended to provide assistance todeveloping countries in coping with theenvironment problems. The GEF was fundedfrom contributions by the countries concernedand grants from the donor countries.

In November 1990, an agreement wasreached on the cooperation between theInternational Finance Cooperation (IFC)International Finance Cooperation (IFC)International Finance Cooperation (IFC)International Finance Cooperation (IFC)International Finance Cooperation (IFC)with Credit Lyonnais to promote the developmentof small-scale and medium-scale enterprisesunder Multicountry Loan Facility (MLF). Underthe cooperation, all branches of Credit Lyonnaiswould represent the IFC in identifyingprospective investors and borrowers in particularcountries and conduct feasibility studies onprospective projects. The amount of loan for eachproject was fixed between $3 million and $6million in which Credit Lyonnais would provide50% of the loan approved.

As a development bank, the AsianAsianAsianAsianAsianDevelopment Bank (ADB) Development Bank (ADB) Development Bank (ADB) Development Bank (ADB) Development Bank (ADB) provides long termloans and equity participation in addition toproviding technical assistance. Loans granted by

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the ADB are mainly used for financing projectsin the agro-industry, education, energy, financialsector, health and population, industry, and cleanwater supply and urban housing improvements.As is the case with the World Bank, since 1988the ADB has increased its emphasis onenvironment aspects of projects financed by theBank.

The source of the ADB financing mainlyoriginates from equity participation of itsmembers. Furthermore, there is also a source offinancing for which certain countries can borrowat a more concessional terms with longer maturityand relatively lower interest rate. In order topromote its concessional lending capacity for thelower income member countries until 1994, theADB has targetted an increase of special fundin the amount of $10.4 billion.

The Islamic Development Bank Islamic Development Bank Islamic Development Bank Islamic Development Bank Islamic Development Bank providesassistance in the forms of equity participation,loans, installment sale, and technical assistance.To finance import of goods for the developmentof its member countries, the IDB provides ascheme called Import Trade Financing Operation(ITFO). Furthermore, the IDB also providesassistance in the form of Longer-Term TradeFinancing Scheme (LTTFS) designed to promoteexports of the participating member countries.

D .D .D .D .D . Cooperation of the South-East AsianCooperation of the South-East AsianCooperation of the South-East AsianCooperation of the South-East AsianCooperation of the South-East Asian

Nations (ASEAN)Nations (ASEAN)Nations (ASEAN)Nations (ASEAN)Nations (ASEAN)

Cooperation among the ASEAN countriescontinued to strengthen, and efforts were madeto promote cooperation between ASEAN andindustrial countries. During the 22nd ASEANEconomic Ministers (AEM) meeting in Bali,October 1990, new proposals were put forwardand agreements were reached in the areas of

trade, finance, and banking. In the area of trade,a new proposal, Common Effective PreferentialTariff (CEPT), aims at promoting trade amongthe ASEAN countries. In addition to adopting acommon effective tariff, the proposal embracesa liberalization of various obstacles to tradeincluding removal of non-tarrif barriers andadherence to the principles of a free foreignexchange system for goods produced under theAsian Industrial Joint-Venture (AIJV). The 22ndASEAN Economic Ministers meeting also agreedon the need for further improving and extendingthe Preferential Trade Arrangement for theperiod 1992 - 1999. The program includes adeepening of the Margin of Preference (MOP)and a reduction of the Exclusion List as well aslowering the local content requirements. Underthe 1990 PTA program, 500 commodities weregranted a 25% MOP and 3,544 commoditiesenjoyed a deepening of MOP. Up to 1990, a totalof 15,295 commodities were granted MOP.

The ASEAN countries also adopted a commonstrategy for the multilateral trade negotiations onservices under the Uruguay Round. In the area oftrade in services, the ASEAN countries havepursued and active dialog through the South EastAsian Central Banks Association (SEACEN). Aspart of this common strategy, the SEACENsubmitted a counter proposal to the draft on tradeliberalization proposed by the industrial countries.

In the area of finance and banking, thecommitment to expand cooperation in fiscal,finance, and monetary management as wellas cooperation in the area of capital marketwas reemphasized. It is noteworthy that theuse of currencies of the ASEAN countries,especially the Singapore dollar, as a means ofpayment for the transactions among theASEAN countries continued to expand.

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With a view to promoting cooperation withindustrial countries, during the reporting yearASEAN conducted dialogs with the United States,Japan, New Zealand, and South Korea. Emphasiswas placed on long-term economic cooperation. Adialog between ASEAN and the United Stateswhich took place in September 1990 in Bangkokdiscussed the establishment of ASEAN PrivateInvestment and Trade Opportunities (PITO) aimedat removing trade barriers and the establishmentof ASEAN Growth Fund intended to develop acapital market. In another dialog held in the samemonth in Vancouver, an agreement was reached toestablish the ASEAN - US Working Group onEconomic Relation and the Trade and InvestmentCooperation Committee.

During the 12th ASEAN - Japan meeting inSeptember 1990, it was expressed that theASEAN development fund for all membercountries be raised in view of the appreciationof the Japanese yen. Regarding the Committeeon Finance and Banking (COFAB), ASEAN

expected that the ASEAN - Japan DevelopmentFund (AJDF) for financing regional projectscould be utilized by all ASEAN countries onthe common terms and requirements.Furthermore, it was also expected that a greaterflexibility be given in considering project costsproposed by the ASEAN countries.

During the ASEAN - New Zealand 10thmeeting in Wellington, New Zealand, May 1990,ASEAN expressed the need for improving NewZealand’s Generalized System of Preferences(GSP) including an expansion of its coverage anda deeper cut in tariffs. ASEAN also expectedthat New Zealand would review its importrestrictions on agricultural products, sawntimber, and other forest products.

The first ASEAN - Republic of Korea JointSectoral Cooperation Committee (JSCC) meetingin Jakarta, August 1990, approved severalprojects intended to promote tourism and tradebetween ASEAN countries and South Korea.

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A .A .A .A .A . National IncomeNational IncomeNational IncomeNational IncomeNational Income

In 1990, the economy of Indonesia continuedto perform favorably, recording a growth rate of7.4% as measured by real Gross DomesticProduct (GDP). The high economic growth wasattributable to a series of adjustment measuresundertaken by the Government in recent yearswhich brought about a business climate attractiveto the private sector. The increasing role of theprivate sector was mainly recorded in themanufacturing sector. Unlike in the previous year,economic growth in 1990 was marked by a rapidincrease of domestic demand and a sharpdecrease in the external sector (net). Partlybecause of the rise in investment activity, importsincreased significantly. Meanwhile, exportgrowth only rose slightly due to lower economicgrowth in industrial countries as well asweakening of primary commodity prices. Itcould be noted that in 1990 Gross NationalProduct of Indonesia grew by 7.2% and NationalIncome rose by 7.3%.

GDP measured in current prices in 1990reached Rpl97,721.0 billion. Taking intoaccount the mid-year population, GDP percapita in 1990 rose by 17.5% reachingRpl,109.8 thousand. Based on the populationcensus of 1990, with the success of familyplanning program, the growth rate of populationduring the period of 1981-1990 decreased from2.32% during 1971-1980 to 1.97%, resultingin a mid-year population of 178 millioninhabitants.

From the expenditure side, expenditure side, expenditure side, expenditure side, expenditure side, the highgrowth of the economy in 1990 was brought about

by a substantial growth of domestic demand,namely 11.6%, mainly caused by increases inconsumption expenditure (8.8%) and grossdomestic capital formation (16.2%).

However, the remarkable growth of grossdomestic capital formation was not supportedby a sufficient level of domestic savings so thatforeign funds were still required as reflected ina significant surplus in the capital account.

Significant growth of consumption took placein the household subsector, i.e. by 9.9%,compared with 4;2% in the preceding year. Thedevelopments were attributable to the increasein income and consumer credits from banks.Meanwhile, government consumptionexpenditure grew by only 3.4% compared with10.5% in 1989. The lower growth was closelyrelated to prudent fiscal management.

Growth of gross domestic capital formationin 1990 accelerated to 16.2% compared with13.4% in 1989. This acceleration was broadlyin line with a significant increase in therealization of approved investment projects underthe domestic investment (penanaman modaldalam negeri or PMDN) as well as foreign directinvestment (penanaman modal asing or PMA)schemes. The developments showed anincreasing role of the private sector in thedevelopment process and a success of theGovernment in fostering a favorable investmentclimate. In addition, to stimulate the utilizationof regional potentialities, the Governmentencouraged investors to conduct business in theeastern part of Indonesia by providing tax reliefin the forms of longer compensation period upon

III. NAIII. NAIII. NAIII. NAIII. NATIONAL INCOME AND PRICESTIONAL INCOME AND PRICESTIONAL INCOME AND PRICESTIONAL INCOME AND PRICESTIONAL INCOME AND PRICES

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previous losses and reduction in land andbuilding tax.1)

By sector, most of the approved PMDN andPMA projects in 1990 were intended for themanufacturing sector, namely Rp40.9 trillion or68.2% of the total PMDN approvals and $5.6billion or 64.5% of the total PMA approvals.By country of origin, the approved PMAs weremainly originated from Japan, Hong Kong, andSouth Korea.

The remarkable growth of investments werealso attributable to the relocation of industries,especially form Japan and newly industrializedeconomies (NIEs) due, among other things, to

relatively high cost of production in thosecountries. The relocation was also due to adeterioration in those countries’ competitivenessin the international market followingappreciation in their currencies. Moreover, thecancellation of Generalized System ofPreferences assigned for NIEs made theirexportable commodities lose the specialtreatment.

The growth rate of the external sector (net)decreased as growth of imports was much higherthan that of exports. The high increase in importswas in line with the large import demand forinvestment and production purposes.

The terms of trade in 1990 rose substantiallyby 14.0% compared with 0.1% in the precedingyear. The rise was due to the increase in export

1) Minister of Finance Decrees Nos. 747 and 748/ KMK.04/1990, June 28, 1990.

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deflator, of 10.8%, while import deflatordeclined by 2.7%. Along with this developments,the rate of growth of Gross Domestic Income(GDY) rose from 7.6% in 1989 to 10.3% in1990.

From the production side, production side, production side, production side, production side, theremaining high GDP growth in 1990 was mainlydue to the rapid growth of the manufacturingsector as well as the trade, hotel, and restaurantsector. The increase of the manufacturing sectorgrowth, from 9.1% to 12.3%, raised the share

of this sector in GDP from 18.4% to 19.3%.Meanwhile, the decline of the share of theagricultural sector in GDP from 20.5% to19.6%, and the increase in the share of othersectors, from 45.5% to 45.9%, indicated thatthe structure of Indonesian economy becamemore diversified. Classified by oil/gas andnon-oil/gas, in 1990 the non-oil/gas sector grewby 7.9%, as compared with 8.4% in thepreceding year, while the oil/gas sector grew by5.3% compared with 4.0% in the precedingyear.

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The growth of the agricultural sector in 1990was 2.8% compared with 3.7% in the precedingyear. The deceleration was mainly caused by theslowdown in the growth of rice production from2.6% in 1989 to 1.2% in 1990 due to droughtand decreasing planting areas.

The manufacturing sector in 1990 recordeda growth rate of 12.3% compared with 9.1% inthe preceding year. The high growth rate of themanufacturing sector took place both in thenon-oil/gas (13.0%) and oil/gas (10.1%)subsectors. It may be noted that the high growthin the oil/gas manufacturing subsector in 1990compared with that in 1989 was mainlyattributable to the increase in domestic oilconsumption.

The rate of growth of the trade, hotel, andrestaurant sector remained high, namely 8.3%mainly due to the growth of the wholesale andretail trade subsector (8.2%). The high growthrate was in line with the significant growth ofother sectors. Meanwhile, the growth of the hoteland restaurant subsector kept increasing at a highrate, i.e. by 8.7%, resulting from a pickup in touristactivity associated with Visit Indonesia Year 1991.

In 1990, the growth rate of the mining andquarrying sector declined to 4.3% compared with5.8% in the preceding year. The decline tookplace both in the oil/gas and other subsectors.Especially for other subsector, the slowdown ofgrowth was caused by the weakening in theprices of several mining commodities in theinternational market. Some mining commoditiesexperiencing decreases in production were tin,silver, and nickel matte.

The relatively high GDP growth wassupported by the high level of activity in the

wide-ranging sectors of the economy. Thisdevelopment was accompanied by an expansionof employment opportunity and a higher level ofincome of the majority of population, includingwage earners. In this regard, the averageminimum wage in 1990 increased by 14.41%in nominal terms, or 4.88% in real terms.

The enhanced role of the private sector inthe economy had also increased the role ofcooperatives. The number of cooperatives in1990 increased from 36,147 to 36,502 units andtheir members rose from 25,601 to 29,134thousand. The activities of cooperatives coveredvarious production sectors, particularlyagriculture and manufacturing.

B. PricesB. PricesB. PricesB. PricesB. Prices

In the reporting year, the Government madeefforts to dampen increased inflationarypressures in order to maintain externalcompetitiveness. With a view to containingdemand pressures, the Government conducteda tight monetary policy supported by prudentfiscal policy. In addition, the Government tookmeasures to increase the supply of certain goods,such as cement by exempting them from importduty and improving their distribution.

Starting April 1990, a new consumer priceindex (CPI) was introduced; the index measuresconsumer prices in a sample of 27 cities with1988/89 as the base year (the previous sampleconsisted of 17 cities using 1977/78 as the baseyear). The new consumer price index usedconsumption pattern based on the Cost of LivingSurvey conducted in the period of April 1988-March 1989 in the 27 provincial capitals of thecountry. Based on the new consumption pattern,the number of consumed goods and services has

27

been changed to 200-224 from 115-150 (underthe 1977/78 survey). The new index reflects thechange in the consumption pattern associatedwith rapid developments since the late 1970s.

Inflation rate in the reporting year rosesharply to 9.11% from 5.48% in the precedingyear. Of the 9.11% inflation rate, 3.26%originated from housing, 2.93% frommiscellaneous goods and services, 2.37% fromfoodstuffs and 0.55% from clothing. The highrate of inflation in the reporting year was

attributable to cost-push factors which resultedfrom adjustments on fuel oils’ prices andtransportation fares undertaken by theGovernment. Moreover, the rate of inflation wasalso influenced by demand-pull factorsoriginating from the increase in income and therapid growth of financial sector which could notbe matched by the increase in domesticproduction.

The average monthly price increase in thereporting year, as measured by the CPI, was

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0.76% compared with 0.46% in the precedingyear High price increase occurred particularlyin the first semester of the reporting year,especially in April (1.42%), June (1.29%), andJuly (2.21%). In the following semester, the priceincrease was lower, except in October (1.03%).

The high price increase in April was closelyrelated to seasonal activities associated with TheIdul Fitri Day. It was reflected mainly in higherfoodstuffs and clothing prices. In June, the highprice increase was recorded mainly inmiscellaneous goods and services as a result ofadjustments made to transportation fares,value-added tax (VAT) on tobacco, and the exciseon cigarettes. Furthermore, the fuel-oils priceadjustment on May 25, 1990 also caused priceincreases in the housing group. Owing totransportation fares adjustment in June-July1990 and increases in tobacco VAT as well ascement prices, a high price increase took placein July 1990. Price increases were registeredmainly in miscellaneous goods and services group

and housing group. In October, the high priceincrease was mainly recorded in housing groupas prices of cement kept increasing in someregions. Moreover, increase in medical costs insome regions caused a rise in the index for themiscellaneous goods and services group.

Another indicator to measure pricedevelopments, the Wholesale Price Index (WPI),reached an average increase of 10.30% in1990/91 compared with 8.55% in the precedingyear. The increase in the reporting year wasmainly caused by rises in export prices(21.48%), particularly of oil/gas (32.48%).Prices of non-oil/gas export commoditiesincreased by 0.51%. Moreover, prices ofagricultural products rose by 7.78%, the samerate as in the preceding year, those of miningproducts by 9.43% compared with 8.90%, andthose of manufacturing products by 7.14%compared with 5.66% in the preceding year.Meanwhile, prices of imported goods grew by6.01% compared with 10.24% in 1989/90.

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A .A .A .A .A . Monetary PolicyMonetary PolicyMonetary PolicyMonetary PolicyMonetary Policy

Monetary policy, along with othermacroeconomic policies, aims at serving the goalof economic development by maintainingdomestic and external balances. In this context,the Government continued to adopt appropriatepolicies in monetary, fiscal, balance of payments,and real sectors. To achieve this it was thennecessary to encourage mobilization of domesticsavings thereby providing more funds fordomestic investment. For this purpose, a seriesof structural adjustments in finance, money, andbanking has been initiated since the introductionof policy package of June 1983. As the monetaryauthority, Bank Indonesia conduct its monetarypolicy mainly through the use of marketoperations and discount facilities.

It is worth noting that the positive impactsof the structural adjustment policies werereflected in the high growth of investment andthe rapid development of the banking sector. Thesurge of investment activity was facilitated by arapid increase in bank credits which fueleddomestic aggregate demand. On the other hand,a high economic growth has led to animprovement in per capita income, therebyincreasing consumers’ purchasing power. Theincrease in production cost and aggregatedemand, coupled with a shortage of certaincommodities such as cement and selectedcommercial vehicles, have led to pressure ondomestic prices. The cost of a high rate of inflationwould result in a deterioration in the balance ofpayments, and ultimately the pace of economicgrowth and distribution of income. On the otherhand, fears of the drop in world oil price

following the Gulf crisis brought aboutspeculation against the rupiah. Bank Indonesiahas responded promptly by tightening monetarypolicy, and this policy stance was supported bya restrictive fiscal policy. The main thrust of themonetary policy stance was to control domesticinflation and cope with speculative attacks inthe foreign exchange market. In the fiscal front,measures to raise revenue and cut expenditureincluded a reduction of budget subsidy on fueloils, a broadening of coverage of value addedtaxes to include services, and a raising oftransport fares. In addition to above measures,the Government sought to secure an adequatesupply and smooth distribution of goods andservices.

The rapid growth of the banking systemfollowing successive stages of deregulation calledfor a prudent regulatory framework. BankIndonesia responded by introducing a new setof rules regarding banking supervision. This isparticularly designed to promote a sound andefficient banking system so as to secure theinterest of depositors and to foster thedevelopment of an efficient financial market.

It is worth noting that the monetary policyundertaken several years prior to 1990contributed to the rapid growth in reserve moneyand money supply. This growth was needed tomeet growing demand for liquidity to financeinvestment and production. The high growth ofmoney supply was attributable to a rapidexpansion of bank credits. A series ofderegulations in finance, monetary and bankinghas provided more room for banks to expandtheir credits to the private sector, and this made

IVIVIVIVIV. MONET. MONET. MONET. MONET. MONETARARARARARY POLICY AND DEVELOPMENTY POLICY AND DEVELOPMENTY POLICY AND DEVELOPMENTY POLICY AND DEVELOPMENTY POLICY AND DEVELOPMENT

30

possible a large increase in funds mobilization.Bank Indonesia liquidity credits also played arole. In 1989/90, the rapid increase in moneysupply was also influenced by a marked increasein offshore borrowing following the removal ofceiling on banks’ offshore borrowing in March1989. Moreover, the sharp reduction in reserverequirements -- from 15% to 2% in October1988 has created a large excess reserve whichin turn enabled banks to expand credits to theprivate sector. This phenomenon was alsoreflected in the continued increase in the moneymultiplier.

In line with the strong demand forinvestment and consumption goods, money andcredits grew rapidly in 1989/90 by 47.6% forM1, 45.7% for M2, and 53.8% for credits. Thesedevelopments, on the one hand, resulted in ahigh growth of production; on the other hand,they added pressure on domestic prices.

Efforts to curb inflation at the beginning ofthe reporting year were also supported by therigorous implementation of the January 1990policy package, especially the reduction of BankIndonesia’s liquidity credits. In the long run theJanuary 1990 policy package was aimed atimproving the national credit system, but in theshort run it led to the tightening of domesticliquidity, especially since June 1990.

As mentioned above, the strong growth ofdomestic demand coupled with an increase inproduction costs induced pressures on domesticinflation, which reached 3.29% in the firstquarter of 1990/91. In order to curb thisinflationary pressure, Bank Indonesia tighteneddomestic liquidity further by continuing thephasing out of liquidity credits and conductingcontractionary open market operations. This was

reflected in a large increase in SBIs sales whichwas accompanied by a jump in the discount ratefrom an average of 11.33% in March to anaverage of 16.13% in June to 19.95% inNovember 1990.

In addition, efforts to curb the inflation ratewere also conducted through a bettercoordination between monetary policy and otherpolicies including in the trade and fiscal areas.In the real sector, attempts have been made tosmoothen the distribution of goods and services,e.g. easing restrictions on imports of cement andcommercial vehicles. In the fiscal area, theGovernment in October 1990 introduced ceilingson each Treasury office’s deposits maintainedwith banks and reinforced the regulation thatdeposit money banks should immediately transferall tax receipts to Bank Indonesia.

With the coordination among variouseconomic policies, the inflation rate was broughtdown to 0.33% in November and 0.06% inDecember from their levels of 2.21% in Julyand 1.03% in October 1990. The high figuresin the foregoing two months were mainlyattributable to the increase in transport faresand cement price. As a consequence of thesemovements, the inflation rate for 1990 as a wholeaveraged 9.53%.

The uncertainties concerning the externalsector stemming from fears of a drop in the worldoil price due to the Gulf crisis resulted inexcessive speculation in the foreign exchangetransactions during the late 1990/91. Thisreflected in a large outflow of foreign exchangein the period. In order to maintain monetarystability, monetary policy was tightened furtherthrough the policy action taken on February 27,1991, which took effect at the beginning of March

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1991. With this action, Rp8.1 trillion 1) fromstate-owned enterprises and agencies’ depositswith domestic banks was converted into specialcertificates of Bank Indonesia (SBIs) at 22.0%annual discount rate with one year maturity. Atthe same time, Bank Indonesia purchased specialmoney market securities (SBPUs) amounted toRp6.1 trillion 2) with shorter maturities atinterest rates ranging from 18.75% to 23.00%per annum. Netting out the above transactions,the liquidity squeeze of the February 27, 1991policy action amounted to Rp2.0 trillion. It isworth noting that such a policy was also aimedat improving the effectiveness of open marketoperation in two directions.

The tightening of monetary policy has led toan increase in interest rates, which in turn hadthe intended effect of encouraging financialsavings and restrained the growth of bankcredits, particularly during the last quarter ofthe reporting year. These developments resultedin slowing down the growth of domestic demand,which helped reduce the inflation rate in thelast quarter of 1990/91 to only at 1.09%, inflationrate to 9.11% in the fiscal year 1990/91. Thelowering of the inflation rate helped restorecredibility of the Government’s policy andconfidence in the rupiah.

At the end of February 1991 Bank Indonesiaintroduced a new set of measures designed topromote a sound development of banking system.These measures encourage banks to improve theirmanagement, strategy, and operational systemin order to better, cope with the rapiddevelopment of banking operation both domesticand overseas. An important element in this new

policy is the introduction of new capital adequacyrequirements which are expected to encouragebanks to consolidate their financial conditionsand to be more cautious in managing theiroperations.

B. Reserve Money and the Money SupplyB. Reserve Money and the Money SupplyB. Reserve Money and the Money SupplyB. Reserve Money and the Money SupplyB. Reserve Money and the Money Supply

The tight monetary policy adopted duringthe reporting year resulted in slower growth ofreserve money and the money supply both innarrow (M1) as well as broad (M2) terms. Thiswas mainly attributable to the declining trendof bank credits as a result of the phasing out ofBank Indonesia’s liquidity credits and thecontractionary impact of the government sectordue to higher revenues from taxes.

Despite the expansionary effect of foreignassets with Bank Indonesia, reserve moneyincreased only by Rp0.6 trillion (5.4%) in theyear under view, compared with an increase of18.6% in the previous year (Table IV.1). Thiswas due to the offsetting impact of other factorsincluding government sector, Bank Indonesia’sliquidity credits, and other items.

The expansionary impact of foreign assets(net) with Bank Indonesia amounted to Rp9.8trillion, reflecting a considerable surplus in thebalance of payments. This surplus in the balanceof payments emanated from a sizable capitalinflow mainly in the private sector that morethan offset the deficit in the current account.The large private capital inflow increased thesale of foreign exchange to Bank Indonesia. It isworth noting that part of the capital inflowresulted from offshore-borrowing by banksintended to acquire more domestic liquidity(rupiah) to meet the growing demand for credits.Foreign exchange sales by deposit money banks

1) The special SBls sales amounted to Rp9.9 trillion.2) The special SBPUs sales amounted to Rp7.2 trillion.

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(DMBs) to Bank Indonesia resulted in a rapiddecline of DMBs net foreign assets (Chart 2).

In 1990, the government sector, showed acontraction of Rp5.4 trillion in the reservemoney, compared with an expansion of Rp0.6trillion in the previous year. This contractiontook place during the third and fourth quartersof 1990/91, and resulted mainly from theimposition of ceilings on Treasury offices’deposits with deposit money banks and theregulation sipulating that banks have toimmediately transfer their tax collection to BankIndonesia. The data shows that the tax collectionwas significantly high during the third and fourthquarter.

The implementation of the January 1990policy measures has squeezed the BankIndonesia’s liquidity credits by Rp4.4 trillion,thereby reducing the outstanding amount toRpl3.1 trillion at the end of March 1991. Asseen in Chart 3, the liquidity credits continuedto increase until the end of 1989/90, and at thesame time, contributed a major share of reservemoney. By streamlining various sectors eligiblefor liquidity credits, the share of the liquiditycredits in reserve money has declined markedlysince June 1990.

Overall, factors affecting reserve moneyexcluding the above monetary instruments had anexpansionary effect of Rpl.1 trillion (8.7%). BankIndonesia prevented this from spilling over intoan excessive expansion of money supply throughopen market operation. This was carried outthrough the sizeable increase in SBIs sales, andthe purchase of SBPUs in smaller amount. Tocompensate for the shortage of banks’ liquidity,Bank Indonesia also provided discount facilitieswhich were increasingly used by banks, albeit very

small in comparison to SBIs transactions. On anet basis, the open market operations resulted ina contraction of Rp0.5 trillion.

The tight monetary stance was also mirroredin the decline of banks’ excess reserves. Theratio of excess reserves to total deposits declinedfrom 4.0% at the end of 1989/90 to 2.7% at theend of the reporting year (Table IV.2).

As a result of the slowdown in the growth ofreserve money in 1990/91 M2 increased onlyby 26.0%, reaching Rp81.1 trillion, comparedwith an increase of 45.7% in the previous year.Furthermore, M1 increased only by 6.4% incomparison to an increase of 47.6% in the yearbefore. The considerable declining trend of themoney growth was mainly accounted for by anoticeable decline in the growth of demanddeposits to 1.2% from 70.1% in the previousyear (Table IV.3). The tightening of monetarypolicy to some extent, contributed to a shift inpublic’s portfolio preference as reflected in thetrend of M1 and M2 during the fourth quarterof 1990/91. In this quarter M1 declined slightlyby 1.0%, resulting from a decline in demanddeposits by 1.2% and in currency by 0.8%. Inthe absence of the measure forcing the stateowned enterprises to convert their deposits intoSBIs, quasi money would have risen even faster.Moreover, demand deposits in February 1991rose drastically, reflecting a temporary increasein bank transfers associated with a shift in timedeposits from one bank to another to exploitearnings from interest rate differentials amongbanks. As all transactions related to such banktransfers cleared, at the end of March 1991 demanddeposits fell back to a modest level. As a result ofthe conversion of state-owned enterprises depositsto SBIs in March 1991, quasi money declined by5.4% during the last quarter of the 1990/91.

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CHART 2CHART 2CHART 2CHART 2CHART 2NET FOREIGN ASSETSNET FOREIGN ASSETSNET FOREIGN ASSETSNET FOREIGN ASSETSNET FOREIGN ASSETS

(trillions of rupiah)(trillions of rupiah)(trillions of rupiah)(trillions of rupiah)(trillions of rupiah)

CHART 3CHART 3CHART 3CHART 3CHART 3RESERRESERRESERRESERRESERVE MONEYVE MONEYVE MONEYVE MONEYVE MONEY(trillions of rupiah)(trillions of rupiah)(trillions of rupiah)(trillions of rupiah)(trillions of rupiah)

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The money multipliers for both M1 and M2continued to increase, from a monthly averageof 1.9 and 5.9 in 1989/90 to 2.1 and 7.4 in1990/91, respectively. The continued increasein money multipliers during the last few yearswere mainly caused by the sharp reduction inthe required reserves ratio from 15% to 2%coupled with the rapid growth of the bankingsystem following the October 1988 deregulation.From October 1988 onwards, the moneymultiplier of M2 grew faster than that of M1.This was closely associated with the switch ofportfolio preference of depositors from demanddeposits toward time and savings deposits toexploit the higher interest rates paid on timeand savings deposits, and the introduction of newsavings schemes with features that are close todemand deposits.

Efforts to expand the banking networksthroughout the country have accelerated themonetization of the economy. This progress wasreflected in the increase in the ratio of M2 toGross Domestic Product (GDP). From October1988 onwards, this ratio continued to rise, from0.31 at the end of 1988 to 0.38 at the end of

1989 and 0.41 at the end of 1990 (Table IV.3).The higher level of monetization coupled withthe flourishing banking system will be supportiveof continued growth of productive economicactivities.

C. Factors Affecting Money SupplyC. Factors Affecting Money SupplyC. Factors Affecting Money SupplyC. Factors Affecting Money SupplyC. Factors Affecting Money Supply

In the reporting year, the expansion of moneysupply, was contributed by both domestic andexternal factors. As regards domestic sources,the expansion emanated from continued rapidexpansion of bank credits, despite a noticeablecontraction of the government sector and otherassets (Table IV.3). Moreover, the external sec-tor as reflected in the change of foreign assetswas expansionary, i.e. by Rp2.3 trillion, com-pared with a contraction of Rp0.7 trillion in thepreceding year. The expansionary trend whichwas closely related to the higher export earn-ings from oil and gas due to the increase in theworld price of oil took place in the last two quar-ters of the year.

The contractionary impact of the governmentfinance increased sizeably, from Rp60 billion

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in 1989/90 to Rp4.8 trillion in 1990/91. Thiswas mainly due to considerably high revenuesfrom oil and gas as well as from taxes and otherlevies. The continued increase in the taxcollection was made possible by the governmentefforts to improve tax administration coupledgrowth of national income. Revenues from importduties also increased considerably, as a result ofthe surge of imports associated with the rise indomestic demand. It is important to notice thatthe continued increase in tax revenues duringthe last five years resulted in a higher share ofnon-oil and gas revenues than that of oil and gasrevenues. In line with this favorabledevelopment, government savings rose steadily,thereby increasing its share in developmentexpenditures.

Claims on official entities and publicenterprises and on private enterprises andindividuals in the period under review stillincreased substantially by Rp29.7 trillion(37.5%) compared with an increase of the sameamount in the preceding year. Claims on privateenterprises and individuals continued to riserapidly by Rp31.3 trillion (44.4%) in 1990/91after increasing by Rp28.6 trillion (68.2%) inthe preceding year. Nevertheless, on a quarterlybasis claims on private enterprises andindividuals showed a declining trend,particularly in the last quarter of 1990/91. Thiswas mainly attributable to the increase ininterest rates and the further withdrawal of BankIndonesia liquidity credits that led banks to bemore prudent in their credit policy. It is worthnoting that the rapid expansion of the claims onthe private sector was made possible by theremarkable growth of funds mobilizeddomestically as well as easier banks’ access tooffshore borrowing. The substantial offshoreborrowing largely contributed to the more rapid

growth of bank credits than that of banks’deposit as mirrored in a higher loan to depositratio, from an average of 118% at the end of1989 to 130% at the end of the reporting year.

As far as Bank Indonesia liquidity creditsare concerned their share in total bank creditsdeclined to 13% compared with 25% at the endof March 1990. To meet the strong demand forcredits, banks not only relied on deposits butalso raised their own capital and offshoreborrowing.

Net other assets contracted by Rpl0.4 trillionin 1990, compared with Rp8.7 trillion in thepreceding year. This contraction took place inthe last quarter of the reporting year, reachingabout Rpl0.7 trillion, which was related mainlyto the sale of special SBIs to state-ownedenterprises and higher capitalization of banks.During the first three quarters, however, otherassets had an expansionary impact of Rp0.3trillion.

D. Bank Credits and FundsD. Bank Credits and FundsD. Bank Credits and FundsD. Bank Credits and FundsD. Bank Credits and Funds

In the year under review, bank funds andcredits continued to rise substantially, albeit ata declining trend. The sizeable growth ofmobilized domestic funds was largely attributableto the expansion of banking network, thediversification of banking products, higherinterest rates, and the improvement of nationalincome. Meanwhile, the fast growth of bankcredits facilitated the robust economic activitiesin 1990/91.

Bank funds consisting of demand deposits,time deposits, and savings deposits both in rupiahand foreign exchange increased by Rpl8.3 trillion(30.9%) in the reporting year, compared with

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Rpl9.7 trillion (49.8%) in the preceding year(Table IV.4). Time and savings deposits grewmore rapidly by 37.1% and 41.6%, respectively,whereas demand deposits rose only by 12.3%.Higher interest rates paid on time and savingsdeposits after mid 1990 were the major factordriving the higher growth of time and savingsdeposits. In addition, innovative savings schemeswhose characteristics are nearer to those ofdemand deposits also played an important rolein this regard. Despite the conversion of thestate-owned enterprises deposits to SBIs1990/91, time deposits still contributed amajor share in total bank funds. The shareincreased from 61.4% in the previous year to64.3% in the reporting year. Meanwhile, theshare of savings deposits in total bank fundstabilized at around 12.5%, whereas that ofdemand deposits decreased from 27.0% to23.2%. Of total deposits, the share of depositswith state banks fell from 51.4% to 44.0% atthe end of the reporting year, and that of depositswith private national banks rose from 39.1% to44.9%.

With respect to foreign exchange deposits, amarked increase was recorded during 1990/91.Demand deposits and time deposits in foreignexchange increased more rapidly by 87.1% and93.3%, respectively, in comparison to an increaseof 64.1% and 51.6% in the preceding year. Thistrend was closely related to foreign exchangespeculation emanating from the rumors about anexchange rate devaluation. In reverse, demanddeposits in rupiah decreased by 0.7%, comparedwith a high increase of 49.6% in the precedingyear. This decline was also attributed to a shiftfrom rupiah demand deposits to savings depositsinduced by the emergence of new schemes ofsaving deposits with more attractive featuresincluding higher interest rates.

By maturity, rupiah time deposits of 1-3month grew by 71.5% compared with 16.7% inthe preceding year, whereas those of 3-24 monthsdecreased by 6.6% compared with an increaseof 44.6% in the preceding year. The higherinterest rates paid on time deposits with shortermaturities than those with longer maturitiesresulted in the more rapid growth of time depositswith shorter maturities. This higher interest rateswith shorter maturities reflected banks’ effortsto meet the need for short-term funds arisingfrom liquidity shortage associated with thetightening of monetary policy. By ownership,rupiah time deposits of individuals stillcontributed a major share of 52.6% followed byprivate and state enterprises with a share of20.1% and 10.7%, respectively (Table IV.5).

Slow growth of bank funds has in turn led toa deceleration of the expansion of bank credits.During the reporting year, the growth of bankcredits in rupiah and foreign exchange sloweddown to 40.3% compared with 53.8% in theprevious year. This slowdown of bank creditsoccurred primarily in rupiah credits whichincreased only by 33.9% compared with 47.5%in the preceding year (Table IV.6). Meanwhile,bank credits in foreign exchange still grewconsiderably by 113.9%. This was attributableto the lower interest rates on foreign exchangecredits and higher confidence of businesscommunity in the stability of rupiah.

By types of credits, consumer creditsincreased considerably by 100.7%, mainlyextended to housing sector and vehicles. Still,the share of consumer credits in total bank creditswas relatively small, 8.1% at the end of thereporting year. In line with the growing demandfor investment, investment credits increasedfurther by 35.7%, compared with 31.0% in the

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previous year, whereas working capital creditsincreased at a declining rate from 61.1% in1989/90 to 37.0% in the year under review.

By group of banks, state banks still dominatedtotal bank credits, although their share declinedfrom 59.5% to 54.5% at the end of the reportingyear. On the other hand, the share of privatenational banks and foreign banks rose respectivelyfrom 31.7% and 5.3% to 35.5% and 6.8% at theend of the year under review.

By economic sector, a major increase inborrowing took place in the manufacturing sector,i.e. 39.5%, and their share in total bank creditsat the end of the reporting year was a dominant(31.2%). This increase was mainly extended tofinance investment in textile, pulp, chemicalsand pharmaceuticals. Credits extended to thetrade sector rose by 29.7% which were used to

finance retail trading, distribution, stockbuilding of domestic merchandise, restaurantsand hotels. A major increase was also recordedin the agricultural sector, i.e. 27.5%, which wasmainly used to finance the purchase of food andsugar under its stockpile and price supportprogramme, and high investment in plantationestate.

Credits extended to small-scale enterprises,the so called KUK, progressed satisfactorily asreflected in an increase in their share in totalbank credits to 22.4% as of the end of thereporting year. Meanwhile, credits extended tocooperatives, as part of the credits to small-scaleenterprises, which was refinanced by the BankIndonesia liquidity credits, increased by 10.6%.This increase reflects government efforts topromote a wider public participation in theeconomic development. In line with the attempts

CHART 4CHART 4CHART 4CHART 4CHART 4BANK FUNDS AND CREDITSBANK FUNDS AND CREDITSBANK FUNDS AND CREDITSBANK FUNDS AND CREDITSBANK FUNDS AND CREDITS

trillions of rupiahtrillions of rupiahtrillions of rupiahtrillions of rupiahtrillions of rupiah

43

to improve farmers’ income and to increase foodproduction, credits to farmers (Kredit Usaha Tanior KUT) for intensification of paddy/secondarycrops rose to Rp725.9 billion at end of reportingyear, and those for small holders sugar caneintensification reached Rpl,936.0 billion.

The February 1991 policy package includesseveral measures to promote a sound nationalcredit system in were introduced. The extensionof credits to finance stock exchange transactionswas prohibited in order to minimize credit riskresulting from large fluctuation in stock prices.For this purpose, banks are also prohibited fromengaging in stock holding, except for equityparticipation.3) In addition, all types of creditsextended by banks and non-bank financialinstitutions including bank guarantees and shareholdings were subject to legal lending limit.Exemptions from the legal lending limit includedcredits covered by a guarantee issued either bygovernment, credit insurance agencies, primebanks overseas, or guarantee under a risk sharingarrangement with other banks. Also included inthe exemptions were credits extended to BULOG,the state agency for food procurement, for foodand sugar procurement and to cooperatives andKUT. Moreover, the legal lending limit regulationwas applied to share holders owning 10% ormore of total bank shares. Those share holderswho owned less than 10% of total bank shareswere treated as ordinary debtors. 4)

E .E .E .E .E . Interest RateInterest RateInterest RateInterest RateInterest Rate

As previously pointed out, the high demandfor bank credits facilitated the acceleration of

investment. However, this strong investment ledto a marked increase in imports of capital goodsas well as raw materials, which in turn led to adeterioration in the current account. As a response,the government undertook measures to restraindemand through a tightening of liquidity. Thistightening of liquidity was also aimed at curbinginflationary pressures and dampening foreignexchange speculation against rupiah. This measureand the consequence increase of SBIs discountrate has led to a squeeze of bank’s liquidity that inturn caused a jump in average interest rates oninterbank transactions, deposits and credits. Onaverage interbank interest rates soared from10.77% at the end of March 1990 to 21.53% atthe end of December 1990 and reached 26.99%at the end of March 1991. At the same time,average interest rates on rupiah time deposits rosefrom 16.86% to 19.84% at the end of December1990 and 23.17% at the end of March 1991. Thehigher increase in interest rates on time depositsoccurred at state banks which raised interest ratesdrastically at the end of February 1991 as aresponse to the monetary action which stipulatedthe conversion of state-owned enterprise depositsinto SBIs. The increase in interest rates alsoaffected foreign banks, with their rates increasingon the average from 15.29 to 23.12%.

By maturity, the interest rates on short-termdeposits rose faster than that on longer-termdeposits. For three month deposits, the interestrates jumped from 16.23% at the end of March1990 to 24.21% at the end of March 1991.Meanwhile, interest rates on twelve-month depositsrose less dramatically, from 17.79% to 20.03%,and those on 24 month deposits from 18.56% to20.35% (Table IV.7). This was mainly due to theimplementation of tight money policy that forcedbanks in the transition period to put more emphasison short-term fund mobilization.

3) Bank Indonesia Circular Letter No. 23/3/UKU, February 28,1991.

4) Bank Indonesia Circular Letter No. 23/3/UKU, February 28,1991.

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Interest rates on foreign exchange deposits inthe year under review showed a declining trend atstate banks and foreign banks, whereas those atprivate national banks rose drastically. The de-cline in the foreign exchange deposits at foreignbanks was a reflection of the lower interest rateson US dollar deposits abroad, as evidened by thedecline in the three-month LIBOR from 8.50%at the end of 1990 to 6.38% at the end of March1991. Interest rates on foreign exchange depositswith state banks that were consistently higher thanthose with other banks in the previous year droppedremarkably to the level approaching the interestrates of foreign exchange deposits with foreignbanks. For illustration, the range of interest rateson foreign exchange deposits of three- month ma-turity with state banks declined from around7.72% - 8.35% to 4.15% - 8.25%. In their ef-forts to acquire more funds, private national banks

raised their interest rates on foreign exchange de-posits as reflected in the increase in the range ofinterest rates on three-month foreign exchangedeposits from 7.25% - 9.25% to 8.50% - 9.25%.Meanwhile, the lower interest rates overseas pro-vided more room for banks to attract offshore loans.

Interest rates on loans rose slower than thoseon deposits. Interest rates on working capital andinvestment credits increased from 20.20% and18.80% to 26.70% and 23.20%, respectively atthe end of the reporting year. The sluggish re-sponse of interest rates on investment credits waspartly associated with the continued extension ofBank Indonesia liquidity credits to refinance in-vestment credits. On the other hand, the quickresponse of the interest rates on working capitalcredits followed more closely the trend of interestrates on short-term time deposits.

Interbank

DepositsInvestment Credit

Working capital credits

0

5

10

15

20

25

30

1988 1989 1990

Chart 5INTEREST RATES(percent per annum)

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A. General PolicyA. General PolicyA. General PolicyA. General PolicyA. General Policy

According to the Fifth Five-year DevelopmentPlan, the funds needed to finance the developmentare to be raised from domestic sources, especiallyfunds mobilized from the private sector. To enhancethe mobilization of funds through financialinstitutions as well as the capital market, theGovernment continued efforts to promote thefunctioning of the money and capital markets.Sound development of the money market canimprove the effectiveness of the central bank’smonetary management, mainly through the openmarket operations. In addition, the efforts toimprove the functioning of the interbank moneymarket will allow banks and non-bank financialinstitutions (NBFls) to manage their funds moreefficiently, which in turn could encourage themobilization of funds from the private. Meanwhile,the Government continued to improve the workingof the capital market in order to encourage themobilization of long-term funds.

Efforts to promote the money market wereundertaken, among other things, through theimprovement of its instruments and institutionalframework. With respect to instrument, in 1971the Government opened up opportunity for banksto issue certificates of deposits (CDs), in additionto other short-term papers traded in the moneymarket. In addition, the reactivation of BankIndonesia certificate (Sertifikat Bank Indonesiaor SBI) in early 1984 and the introduction ofmoney market securities (Surat Berharga PasarUang or SBPU) in early 1985 have also increasedthe utilization of money market instruments bybanks and NBFls in managing their liquidity asboth papers are marketable. With regard to theinstitutional framework, Bank Indonesia has

organized the interbank money market since 1974and has particularly since 1987 promoted thesecondary market for SBIs and SBPUs throughthe issuance of relatively long-term SBIs and theappointment of some banks and NBFls as marketmakers and brokers.

In the meantime, the adjustment measures invarious sectors undertaken up to the reporting yearand the effects of globalization of the economy inconjuction with the free exchange system, haveincreased transactions in the foreign exchangemarket. Besides, a closer link has also evolvedbetween domestic foreign exchange and rupiahmarkets as well as between domestic and overseasforeign exchange markets. These developmentsincreased the need for a sound and integratedpolicy in both foreign exchange and rupiah marketsto achieve monetary stability and a sustainablebalance of payments. The Government has alsomade efforts to develop a sound foreign exchangemarket in order to meet the need for foreignexchange for development. This was expressedespecially in 1989 by removing the ceiling on bankforeign borrowing and replacing it with a limit onthe net open foreign exchange position (NOP) ofbanks and NBFls. The foregoing restriction wasintended to contain bank excessive exposure onforeign exchange risks. Meanwhile, foreignexchange selling by banks originating from exports,swap and reswap, and foreign currency billtransactions are carried out in the morning usingan indicative rate. In the afternoon, BankIndonesia is ready to buy or sell foreign exchange,at a rate determined by Bank Indonesia, based onmarket developments.

Efforts to enhance the efficiency in rupiah andforeign exchange transactions continued to be

VVVVV. MONEY AND CAPIT. MONEY AND CAPIT. MONEY AND CAPIT. MONEY AND CAPIT. MONEY AND CAPITAL MARKETAL MARKETAL MARKETAL MARKETAL MARKET

47

undertaken. With the February 1991 PolicyPackage, Bank Indonesia extended theopportunities for the establishment of brokeragefirms in these two markets. Furthermore, termsand conditions of Discount Facility I wereextended by allowing banks to make use of thefacility through the sale of securities on a repos(repurchase agreement) basis. To promote foreignexchange market and investment activities,conditions with respect to NOP and swaptransactions with Bank Indonesia have also beenadjusted. To increase the protection for banks fromrisks in foreign exchange transactions, BankIndonesia also introduced a regulation on margintrading.

To encourage companies and investors toparticipate in the capital market, with theDecember 1987 Policy Package the Governmentsimplified emission requirements for going publicthrough the elimination of a 10% minimum profitrequirement. Foreign investors are also offered theopportunity to participate in stock ownership andprivate parties to operate securities and parallelbourses. In addition, with the December 1988Policy Package the Government introduced acompany-listing system which was expected toimprove price mechanism in the securities market.It should be noted that through this system,companies are allowed to list all of their issuedand fully paid shares at the bourse. In December1990, the Government introduced a policy packageproviding for an adjustment of Bapepam’sfunctions, the plan in privatization of the JakartaStock Exchange (JSE), and the establishment of acapital market clearing-house.

B. Money MarketB. Money MarketB. Money MarketB. Money MarketB. Money Market

In order to integrate the rupiah and foreignexchange markets and enhance the efficiency of

the markets, Bank Indonesia introduced withFebruary 1991 Policy Package the rules for theestablishment of brokerage firms for those markets.A brokerage firm has to be located in Jakarta andmust have the legal form of a limited company,whether a national or a joint-venture company,and a minimum paid-up capital of Rpl billion isrequired. If the brokerage firm is a joint-venturecompany, the domestic partner could be a company,a group of companies, an individual, or a group ofexperts, while the foreign partner should be awell-known broker in the international moneymarket. Equity participation of the national partneris fixed at a minimum of 15%. The brokeragefirm is allowed to act only as an intermediaryproviding services for banks and NBFIs in therupiah and foreign exchange markets; the companyis not allowed to take open positions.1)

To minimize risks in foreign exchangetransactions faced by banks as well as bycustomers, the February 1991 Policy Package alsocontains provision regarding margin trading.According to the provision, margin trading canonly be carried out by foreign exchange banks,whether for their own account or for the accountof their customers, and should be based on acontract specifying at least the currency,settlement, recording of profit and loss, and amountof margin deposits. Margin trading for a bank’sown account is based on the amount of margindeposits which is limited to 10% of the bank’scapital. In case of a loss reaching 5% of its capitalduring the prevailing fiscal year, the bank has toterminate the trading and can resume only withBank Indonesia’s permission. If the trading is forthe account of the customer, the initial margindeposits is fixed at a minimum of 10% of the agreedmaximum trading position.

1) Board of Directors of Bank Indonesia Decree No. 23/83/KEP/DIR, February 28, 1991.

48

The balance of this margin deposits at all timescan not be lower than 50% of the initial margindeposits. In case of a loss causing the balance ofthe margin deposits to go down reaching 50%threshold (maintenance deposits), the customer hasto replenish the margin deposits within 24 hours.If the customer can not fulfill, the obligation, thebank has to terminate the contract (cut loss). Inaddition, banks are not permitted to carry outmargin trading for customers belonging to the samebusiness group, board of directors, commissioners,supervisors, or owners of the bank concerned. 2)

Along with the new regulation on margintrading, a more restrictive provision wasintroduced on the maximum NOP of banks. Themaximum NOP for all currencies was reducedfrom 25% to 20% of the bank’s capital. In addition,a maximum of 25% of the bank’s capital wasimposed on NOP for each currency.3) Meanwhile,the maximum amount of a bank’s swap with BankIndonesia, which was formerly fixed at 25% ofthe bank’s capital, is revised downwards to 20%,while the maturity of the swap eligible for reswapwith Bank Indonesia should be longer than onemonth but not exceeding three years in maturity.Furthermore, upon the initiative of BankIndonesia, banks and NBFIs can deal in a swaptransaction with Bank Indonesia with the termsand conditions mutually agreed upon by BankIndonesia and the banks/NBFIs concerned. 4)

1. Rupiah money market1. Rupiah money market1. Rupiah money market1. Rupiah money market1. Rupiah money market

In the reporting year, government efforts tocontrol the growth of domestic demand through

a tight monetary policy affected rupiah moneymarket developments. This was reflected in thevolume of transactions and interest rates in theinterbank money market, primary and secondarymarkets of SBIs and SBPUs, and the number ofCD transactions.

The tight liquidity of banks influenced thesupply of funds in the interbank money market,especially from state banks. Meanwhile, banks’and NBFIs’ demand for funds in the interbankmoney market rose significantly bringing abouta sharp increase in the interbank interest rate.In the reporting year, weighted average overnightrate in the interbank money market rose from10.26% in March to 14.50% in June and jumpedup to 21.20% in December 1990. A side fromthe withdrawals of Bank Indonesia liquiditycredit, the squeeze in rupiah liquidity at bankswas also due to the increased foreign exchangespeculations in December 1990. The interbankinterest rate rose further to 26.90% in March1991 due to the conversion of state-ownedenterprises’ funds with banks to SBIs (Table V.1).

The increasing demand for funds in theinterbank money market was also reflected in asignificant increase in the transaction volumein the reporting year, reaching Rp44.3 trillionor 67.9% over that of 1989/90. The increase inthe transaction volume mainly occurred in the lasttwo quarters of the reporting year which wasrelated to the increase in demand for funds in themoney market as a result of foreign exchangespeculation. There were indications that fundssupplied in the money market originated mainlyfrom sales of foreign exchange to Bank Indonesia.

Monetary policy in the reporting year alsoaffected trade of SBIs, SBPUs, and CDs in therupiah money market. In the reporting year, sales

2) Bank Indonesia Circular Letter No. 23/23/UD, February 28,1991.

3) Bank Indonesia Circular Letter No. 23/22/UD, February 28,1991.

4) Bank Indonesia Circular Letter No. 23/25/UD, February 28,1991.

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of SBIs reached Rp32.3 trillion, comprisingsales through auction in the framework of openmarket operation (Rp22.4 trillion) and specialSBIs originating from the conversion ofstate-owned enterprises’ funds with banks (Rp9.9trillion). The sales of SBIs through the auctionsystem decreased sharply by 54.7% comparedwith last year’s sales of Rp49.5 trillion. Takingmaturing SBIs amounting to Rp25.1 trillion intoaccount, in the reporting year outstanding SBIsreached a total amount of Rp9.4 trillion (TableV.2). The decrease in SBI sales through theauction system was connected to the banks’ tightliquidity position due, among other things, tothe withdrawal of maturing and not renewedKLBI and foreign exchange speculation.

SBI quarterly sales through the auctionsystem reached Rp6.5 trillion and Rp5.9 trillionin the first and second quarter, respectively,although the SBI discount rate rose by 4.80percentage points to 16.13% at the end of June1990. The low sales of SBIs pointed to the impact

of the withdrawals of Bank Indonesia liquiditycredit. It should be noted, however, that the SBIdiscount rate was significantly higher and thusmore attractive than the weighted average rateof interest on three month time deposits of16.09% and the interbank money market rateof 15.2%. Furthermore, in the third quarter,SBI sales reached only Rp4.8 trillion althoughthe SBI discount rate increased further to17.87% at the end of December 1990. This wasstrongly connected with the increased tightnessof banks’ liquidity, and also with decrease inSBI sales through the auction system continuedin the fourth quarter, amounting to Rp5.2trillion, was closely related due to the continuedspeculation in the foreign exchange market andthe conversion of state-owned enterprises’ fundswith banks to special SBIs.

Along with the decrease in SBI sales in theprimary market, SBI transactions in thesecondary market decreased significantly toRpl.4 trillion, compared with Rp9.5 trillion in

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the preceding year (Table V.3). The decreasewas due, among other things, to a relatively tighteconomic liquidity and relatively more attractiveinvestment opportunities in time and demanddeposits. For example, SBI transactions in thesecondary market which amounted to Rp858.2billion in the first quarter dropped sharply toonly Rpl99.5 billion in the fourth quarter,although the SBI discount rate rose sharply from13.42% in the first quarter to 21.39% in thefourth quarter.

In the reporting year, SBPUs purchased byBank Indonesia amounted to Rpl0.3 trillion,comprising special SBPUs of Rp7.3 trillion andSBPUs purchased through the auction system ofRp3.0 trillion. It should be noted that purchaseof special SBPUs was intended to aid banks fac-ing a decrease in liquidity due to the conversionof state-owned enterprises deposits in March1991. In line with banks’ liquidity developments,

the purchase of SBPUs through the auction sys-tem was conducted only in the first and fourthquarter amounting to Rpl.9 trillion and Rpl.1trillion, respectively. It was intended to assistbanks in overcoming liquidity problems due tothe withdrawal of maturing Bank Indonesia li-quidity credits since early 1990/91 and conver-sion of state-owned enter prices deposits in earlyMarch 1991 (Table V.2). Meanwhile, in confor-mity with money market developments, theSBPU discount rate rose. The discount rate onseven-day SBPUs rose from 13.50% in early1990/91 to 28.33% at the end of March 1991.

As previously mentioned, the policy packageof February 1991 expanded the opportunity forbanks to make use of Discount Facility I by sellingsecurities on the basis of a repurchase agreementin addition to the existing facility accessibleupon submission of securities as collateral. Amodification was also introduced in the

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maximum amount and maturity of the facility.The eligible securities include SBIs and SBPUswhich have been endorsed by the borrowingbank. The use of SBIs under the new regulationis limited to 5% of the total deposits with theborrowing bank and for SBPUs the maximum isset at 3%. The maturity of Discount Facility I isset at 7 days, which can be extended to amaximum of 14 days; the rate is linked to themorning interbank money market rate. 5)

Up to the end of March 1991, the transactionvolume under the Discount Facility I on the basisof repurchase agreement reached Rp41.8 billion.The average discount rate for the 7 days maturitywas 27.94%. In the reporting ear, the recourseby 44 banks to the non-repo Discount Facility Ireached Rpl.8 trillion. The significantly highutilization of the facility can be attributed to thetightness of the banks’ liquidity. It is worthy tonote that in 1989/90 the recourse to the facilitywas nil.

The issuance of CDs, which has beenencouraged since 1971, rose remarkably fromRpl02 billion at the end of March 1983 to Rp445billion at the end of March 1985 to a peak ofRp590 billion at the end of September 1985(Table V.4). It can be noted that approximately90% of the issuance has been conducted by statebanks and the remainder by foreign banks. Inthe subsequent four years, the issuance of CDsdecreased significantly to Rpl52 billion at theend of March 1989. The decrease took place inthe CDs issued by state banks (from Rp418billion to Rp61 billion at the end of March 1989).Meanwhile, private national commercial banksstarted to issue CDs only since October 1984.

The decline in the CDs was closely related,among other things, to the imposition of a tax onthe sales of CDs before maturity and the increaseof SBI and SBPU transactions.

In the reporting year, the issuance of CDsincreased by 155.3% to Rp434 billion; thiscompares with an increase of 11.8% in thepreceding year. The substantial increase wasmainly attributable to the increase of interestrates and the growing number of private banksissuing CDs. The CDs issued by private andforeign banks rose by 255.9%, compared with33.8% for those by state banks. As such, theshare of private national and foreign banks inthe issuance of CDs rose to 75%.

2. Foreign exchange market2. Foreign exchange market2. Foreign exchange market2. Foreign exchange market2. Foreign exchange market

In 1990/91, foreign exchange market activitiesincreased, which is reflected in the number ofparticipants as well as in the type and the volumeof transactions. The increase was in line with thegrowth of economic activities and the growingtendency of economic globalization. The numberof foreign exchange market participants,comprising foreign exchange banks and NBFIs,increased in the reporting year by 5 joint-venturebanks and 4 private foreign exchange banks to atotal number of 67 banks and NBFIs at the end ofMarch 1991. The increase of the number of bankparticipants was closely related to the easierrequirements for banks to become foreignexchange banks through the October 1988 PolicyPackage.

Along with the increase in the number ofmarket participants, in the reporting yearinterbank foreign exchange transactions rose by119.6% to $172.6 billion comprising spot(70.7%), swap (15.4%), and forward (13.9%)

5) Bank Indonesia Circular Letter No. 23/23/UPG,February 28, 1991.

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transactions. These developments are connectedmainly with the increase in non-oil/gas exportsearnings and the increase in businesses’ needsfor foreign exchange, in conformity with theincrease in economic activities. In addition, theabolition of a ceiling for offshore borrowing andthe establishment of indication rupiah rate forforeign exchange in the morning and atransaction rate in the afternoon also promotedactivities in the foreign exchange market.

The net foreign exchange transactionsbetween Bank Indonesia and foreign exchangebanks comprising spot, including the purchaseof export usance bills of exchange, and swaptransactions resulted in a net buying of foreign

exchange amounting to $3.9 billion in thereporting year, which compares with net sellingof $1.2 billion in the preceding year. All thebuying operations of $3.9 billion was attributedto swap transactions. The bank’s need forliquidity resulted from the withdrawals of BankIndonesia liquidity credit coupled with thepublic’s speculation against rupiah in the lasttwo quarters of the reporting year has led tosubstantial swap transactions with BankIndonesia.

C. Capital MarketC. Capital MarketC. Capital MarketC. Capital MarketC. Capital Market

Various measures taken by the Governmentsince 1987 have accelerated the growth of the

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CHART 6CHART 6CHART 6CHART 6CHART 6BANK INDONESIABANK INDONESIABANK INDONESIABANK INDONESIABANK INDONESIA’S NET FOREIGN EXCHANGE TRANSACTION WITH BANKS’S NET FOREIGN EXCHANGE TRANSACTION WITH BANKS’S NET FOREIGN EXCHANGE TRANSACTION WITH BANKS’S NET FOREIGN EXCHANGE TRANSACTION WITH BANKS’S NET FOREIGN EXCHANGE TRANSACTION WITH BANKS

1988 - 19911988 - 19911988 - 19911988 - 19911988 - 1991(billions of $)(billions of $)(billions of $)(billions of $)(billions of $)

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CHART 7CHART 7CHART 7CHART 7CHART 7INTERBANK FOREIGN EXCHANGE TRANSACTION VINTERBANK FOREIGN EXCHANGE TRANSACTION VINTERBANK FOREIGN EXCHANGE TRANSACTION VINTERBANK FOREIGN EXCHANGE TRANSACTION VINTERBANK FOREIGN EXCHANGE TRANSACTION VALUEALUEALUEALUEALUE

1988 - 19911988 - 19911988 - 19911988 - 19911988 - 1991(billions of $)(billions of $)(billions of $)(billions of $)(billions of $)

56

57

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capital market. These measures include theprovision of opportunity for foreign investors tobuy stocks listed in the stock exchange, thepermission for private companies to organizeparallel bourse, and the imposition of income-tax on interest earned from time and savingsdeposits. The rapid growth of the capital marketwas reflected in the number of companies goingpublic, the value of stocks issued, the stockstraded and the daily trading in the secondarymarket, and the stocks purchased by foreigninvestors. The number of companies going publicand the value of stocks issued rose from 25 witha value of Rp240 billion at the end of March1989 to 66 with a more than 11 time highervalue of Rp2.7 trillion at the end of March 1990(Table V.5). Meanwhile, stocks traded in thesecondary market rose from Rpll2.9 billion in1988/89 to Rpl,691.3 billion in 1989/90. Theremarkable rise in the secondary market is alsoreflected in a sharp increase in daily trading in1989/90 reaching Rpl0.4 billion, compared withRp0.5 billion in 1988/89. The number of stockspurchased by foreign investors, which amountedto 5.6 million at a capitalized value of Rp38.0billion in 1988/89, increased to 151.5 millionwith a value of Rpl.9 trillion at the end of1989/90. The significant increase in transactionscoincided with an increase in stock paces asmeasured by the increase in the composite stockpace index (Indeks Harga Saham Gabungan orIHSG), from 335.54 at the end of 1988/89 to609.02 at the end of 1989/90.

The rapid increase in the number ofcompanies issuing stocks coincided with anincrease in the number of companies issuingbonds. In 1989/90,10 companies issued bondswith a total value of Rp451.5 billion banging inthe number of issuing companies to 19 with a

total value of bonds issued to Rpl.3 trillion atthe end of March 1990.

Capital market activities continued toincrease significantly up to the middle of thesecond quarter of the reporting year. In the twoquarters, the number of companies going publicincreased by 50. The value of stocks issued roseby Rp5.6 trillion and the transactions in thesecondary market reached a total value of Rp4.3trillion. Furthermore, the average value of dailytrading reached Rp40.1 billion in the firstquarter and Rp29.8 billion in the second quarter.The number of stocks bought by foreign investorsalso rose from 151.5 million to 402.2 million.However, the IHSG-index, which continued toincrease to a level of 624.33 in the first quarter,declined to 468.51 at the end of the secondquarter.

In the last two quarters of the reporting year,capital market activities slowed down asreflected in among other things, the decrease inthe number of companies going public, namely12. The average daily trading reached onlyRp21.4 billion in the third quarter and Rp23.8billion in the fourth quarter. Furthermore, thenumber of stocks purchased by foreign investorsdeclined to 504.4 million with a value of Rp4.3trillion. The bearish mood was expressed in thedeclining IHSG-index reaching 408.11 at theend of the reporting year. The decrease in stocksales was followed by a decrease in the issuanceof bonds by companies. In 1990/91, only 1company issued bonds with a value of Rp685billion. With the decision taken by theGovernment to privatize the management ofthe JSE and to automate stock clearing, it isexpected that the bourse’s services will beimproved.

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A. BanksA. BanksA. BanksA. BanksA. Banks

1. Banking policy1. Banking policy1. Banking policy1. Banking policy1. Banking policy

In the reporting year, the banking policycontinued to be directed at enhancing the roleof banks to promote economic development.Deregulation measures undertaken by theGovernment in the financial, monetary, andbanking sectors since June 1983 have hadremarkable impacts on the development of thebanking industry. The number of banks hasincreased substantially, the network of bankingservices widened, banking activities and thevariety of banking products offered haveexpanded; and so has the diversity of instrumentsused in the money market. These developmentscreated a situation where more professionalbankers are needed, technical changes arerequired, and a more efficient banking operationis called for. Consequently, it is necessary forthe banking industry to make adjustments inmanagement, strategy, and operation. In orderto be able to compete internationally, it isnecessary for banks in Indonesia to applyinternational standards in their financialmanagement.

Through the February 1991 Policy Package,the Government set comprehensive guidelinesrelating to bank supervision. The guidelines cover5 main aspects, namely licensing, bank ownershipand management; bank operation; reporting system;bank evaluation system and sanctions; andsupporting factors for improving bank operation.The policy is aimed at creating a sound and moreefficient banking system which safeguards theinterest of the general public and contributes toIndonesian economic development;

Easier requirements were introduced forsetting up bank’s domestic and overseas offices.Commercial and development banks are allowedto open overseas branches or representativeoffices, and to undertake equity participation inbanks or other financial institutions abroad. Forthis purpose, a bank has to have at least oneyear the status of foreign exchange bank. Inaddition, the bank’s rating for the overall bankperformance and the capital adequacy for thelast 24 months should be classified as sound forat least 20 months and fairly sound for theremaining months.1) Commercial, development,and savings banks are allowed to establishsub-branch offices. To open such office, for thelast 12 months the bank should be consideredsound at least for 10 months and fairly sound inthe remaining months.2) To promote soundnessof rural banks, adjustments of the requirementsfor establishing a new office and conducting amerger was made. Rural banks established afterOctober 1988 (post pakto rural banks) may opena branch or another office in the same districtor in the neighboring districts where theprincipal office is located, but outside Jakarta,provincial capitals, and municipal capitals.Furthermore, bank rating for the overallperformance as well as the capital adequacy ofthe bank within the last 24 months, should beat least classified as sound within 20 monthsand fairly sound in the remaining months. Mergeris allowed for a rural bank with a commercial ordevelopment bank which meets the requirementsfor opening a branch. Merger can also beconducted among rural banks located in the

VI. BANKS AND OTHER FINANCIAL INSTITUTIONSVI. BANKS AND OTHER FINANCIAL INSTITUTIONSVI. BANKS AND OTHER FINANCIAL INSTITUTIONSVI. BANKS AND OTHER FINANCIAL INSTITUTIONSVI. BANKS AND OTHER FINANCIAL INSTITUTIONS

1) Bank Indonesia Circular Letters Nos. 23/9/BPPP and 23/10/BPPP, February 28, 1991.

2) Bank Indonesia Circular Letters No. 23/7/BPPP, February28, 1991.

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neighboring districts to become commercial ordevelopment bank as long as they jointly meetthe requirements for opening a commercial ordevelopment bank.

However, with regard to capital, each of themerging rural banks should fulfil therequirements for opening a new commercial ordevelopment bank.3)

Prudential guidelines on bank ownership andmanagement require the majority of the executiveboard members of commercial, development, andsavings banks to be Indonesian citizens and haveat least a 3-year experience in banking operation.Similar conditions are applied to rural banks,with a more lenient requirement of a minimum1-year experience in banking operation.Moreover, family ties up to the second degreeshould not exist among the majority of boardmembers and commissioners, includinghusband, wife, and parents, daughters, and sonsin laws. An individual may hold the position ofa commissioner in not more than 5 banks.4)

To prevent banks from taking on excessiverisks, prudential regulations were also issuedon their operations. A bank is required tomaintain capital at a minimum of 8% of its riskweighted assets, in line with the standard set bythe Bank for International Settlements (BIS).In meeting this requirement, banks are allowedto do it in steps as follows : 5% by the end ofMarch 1992, 7% by the end of March 1993,and 8% by the end of December 19935)

Considering that the soundness of a bank is very

much affected by the quality of its investmentsas well as its capability to anticipate possiblelosses in the investments, adequate provisioningfor risk assets was made mandatory. Provisionof allowances was fixed at a minimum of 1% ofthe total earning assets plus 3% of earning assetsclassified as substandard, 50% of earning assetsclassified as doubtful, and 100% of earning assetsclassified as uncollectible. The required amountof provision can be achieved gradually by theend of 1993.6)

In the context of legal provision that all bankloans have to be secured, a definition was givenof the security as a bank’s conviction on debtor’sability to repay according to the terms agreed.The security is to be established on the basis ofa thorough evaluation of the character, capability,capital, collateral, and the business prospectsof the debtor. Collateral is defined as property,project, or receivables financed with theproceeds of the loan. A bank is not required toask for additional collateral.7) Banks are alsoallowed to have their own policy regardingoverdraft facility which is basically a creditfacility.8) To improve the flow of goods andservices, and to facilitate securities trading, thebank is allowed to issue guarantees in foreigncurrencies. However, the total amount ofguarantees issued to secure the repayment of aforeign loan is limited to a maximum of 20% ofthe issuing bank’s capital.9)

Along with the efforts to improve bankingoperation, a new bank reporting system has been

3) Bank Indonesia Circular Letter No. 23/8/BPPP February28, 1991.

4) Minister of Finance Decrees Nos. 277/KMK.01/1991and 228/KMK.01/1991, February 28, 1991.

5) Bank Indonesia Circular Letter No. 23/11/BPPP,February 28, 1991.

6) Bank Indonesia Circular Letter No. 23/12/BPPP, February28, 1991.

7) Bank Indonesia Circular Letter No. 23/6/UKU February 28,1991.

8) Bank Indonesia Circular Letter No. 23/14/BPPP, February28, 1991.

9) Bank Indonesia Circular Letter No. 23/7/UKU March 18,1991.

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put in place, including a mandatory publicationof a bank’s financial statements in a newspaper.In the face of the growing number of overseasbank offices and the international agreement onthe capital adequacy standards, overseas bankoffices are now also required to send reports.10)

To ensure a sound development in thebanking industry, the bank rating system wasimproved. Bank rating is now based on a morecomprehensive evaluation of the capital, qualityof productive assets, management, profitability,liquidity position, and other aspects affectingthe soundness of a bank. Sanctions for theviolations of the banking rules werestrengthened by the imposition of financialpenalties, in addition to adverse effects onthe bank’s rating.11)

In addition to the main aspects above,improvements were made on a number of areasimportant to support banking activities, such ashuman resources development, informationsystem, cheque clearing system, and BankIndonesia’s Discount Facility I. As regardshuman resources development, a bank is requiredto allocate at least 5% of its budget for humanresources aimed at improving the quality of bankpersonnel, which, in turn, will sustain thedevelopment of banking activities.12)

2. Institutional development2. Institutional development2. Institutional development2. Institutional development2. Institutional development

During the reporting year, the increase inthe number of banks and the expansion of thebanking networks was less rapid than that in

the preceding year. However, a larger numberwas recorded in the opening of new rural banksand the setting up of bank offices in the easternpart of Indonesia. In the reporting year, therewere 18 new banks, consisting of 13 privatenational commercial banks and 5 joint-venturebanks. In addition, there were 2 private nationalcommercial banks conducting a merger, 1 ruralbank merging with a private nationalcommercial bank, and 8 rural banks acquiringthe status of commercial bank. At the end of thereporting year, the total number of commercial,development, and savings banks was 176compared with 151 in the preceding year. Thenumber of bank offices rose by 874 to 3,715(Table VI.1).

The number of commercial banks grew by25, reaching a total of 144 at the end of March1991, comprising 5 state commercial banks, 111private national commercial banks, and 28foreign/joint venture banks. The number ofoffices of commercial banks went up by 782 to3,173, consisting of 957 state commercial bankoffices, 2,168 private national commercial bankoffices, and 48 foreign/joint venture bank offices.In addition, there were 68 foreign bankrepresentative offices and 51 overseas bankoffices comprising 33 of state commercial banksand 18 of private national banks.

In the reporting year, the number ofdevelopment and savings banks remainedunchanged. But the number of offices of thedevelopment banks increased by 63 to 420,consisting of 30 offices of state developmentbanks, 376 offices of regional developmentbanks, and 14 offices of private developmentbanks. Offices of the savings banks rose by 29to 122, consisting of 43 offices of state savingsbanks and 79 offices of private savings banks.

10) Bank Indonesia Circular Letter No. 23/18/BPPPFebruary 28, 1991.

11) Bank Indonesia Circular Letter No. 23/21/BPPP,February 28, 1991.

12) Board of Directors of Bank Indonesia DecreeNo. 23/80/KEP/DIR, February 28, 1991.

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To encourage the expansion of bankingservices in rural areas, 251 rural banks wereopened during the reporting year. With 6 ruralbanks changing their status into commercialbanks and 4 rural bank being merged intocommercial bank, the total number of rural banksrose from 7,820 to 8,058.

In the same period, more banks extendedtheir office networks to provinces in the easternpart of Indonesia, namely Central Kalimantan,East Nusa Tenggara, West Nusa Tenggara, EastTimor, Central Sulawesi, Southeast Sulawesi,Maluku, and Irian Jaya.13) The number of bankoffices in the eastern part of Indonesia increasedfrom 116 to 203.

Bank activities rose in line with theincreasing number of banks and bank offices.Total assets of deposit money banks went up by34.0% compared with 42.6% in the previousyear, reaching Rpl38,425 billion at the end of1990/91 (Table VI.2). Funds mobilized andcredit extended increased by 39.2% and 38.2%,respectively.

B. Other Financial InstitutionB. Other Financial InstitutionB. Other Financial InstitutionB. Other Financial InstitutionB. Other Financial Institution

1 .1 .1 .1 .1 . Non-bank Financial InstitutionNon-bank Financial InstitutionNon-bank Financial InstitutionNon-bank Financial InstitutionNon-bank Financial Institution

(NBFIs)(NBFIs)(NBFIs)(NBFIs)(NBFIs)

Since the October 1988 Policy Package,non-bank financial institutions have beengradually treated as banks, especially in theconduct of supervision. Accordingly, regulationsin the February 1991 Policy Package are also

13) The eastern part of Indonesia is defined to includeprovinces with a relatively low level of economicdevelopment.

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applied to NBFIs except those regarding thelicensing of branch offices or representativeoffices, equity participation in overseas banksor other financial institutions, and margin tradingactivities.

The number of NBFIs remained 14 at theend of the reporting year, comprising 3 NBFIsof the development type, 9 of the investmenttype, 1 of the housing type, and 1 of other type,with the total number of offices reaching 22.Although less than that at the end of the precedingyear, the mobilization of funds and investmentrecorded a considerable increase. The total fundsmobilized, mostly through the issuance ofsecurities and borrowings, reached Rp4,533billion, or rose by 21.1% compared with 31.5%in the preceding year (Table VI.3). During thesame period, securities issued went up by 10.1%compared with 34.9% in the previous year, whileborrowings rose, 42.6% compared with 17.0%in the previous year. The deceleration insecurities issuance was related to higher interestrates on time deposits compared with potentialearnings from portfolio investments. Along withthe slow growth in the mobilization of funds,

investment by NBFIs posted only a 17.1%increase compared with 32.1% in the previousyear, reaching Rp4,434 billion at the end of thereporting year. NBFl’s investment in securities,which had a predominant share in totalinvestments, recorded the biggest share with a7.6% increase compared with 27.2% in theprevious year. The decline in securitiesinvestment was related to the bearish capitalmarket. The loans extended, with a 28.3%share, rose by 47.6% compared with 43.3% inthe previous year.

In the reporting year, total assets of NBFIsrose by 16.0% compared with 36.2% in thepreceding year, reaching Rp4,793 billion. Totalassets of investment-type NBFls grew by 3.0%to Rp2,798 billion compared with 33.4% in theprevious year, while that of the development type(including the housing type) rose 40.9% toRpl,995 billion compared with a 41.8% rise inthe previous year (Table VI.4).

2. Insurance companies2. Insurance companies2. Insurance companies2. Insurance companies2. Insurance companies

The insurance companies, grouped into life

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insurance, social insurance, indemnityinsurance, and reinsurance companies, showeda significant development in the reporting yearas reflected by a remarkable increase in thenumber of companies, total assets, and volumeof activities. The number of insurance companiesrose from 118 to 130 at the end of 1990,comprising 37 life insurance, 5 social insurance,84 indemnity insurance, and 4 reinsurancecompanies. Total assets of insurance companiesat the end of 1990 reached Rp6,204 billion orincreased by 24.3% compared with 27.8% inthe previous year. As the main source of funds,the gross premium rose 22.0% to reach Rp2,237billion compared with 19.2% in the precedingyear. Claims on indemnity decreased by 16.5%to Rp914 billion compared with 16.0% in theprevious year. The decline was related to a lowerclaim in the life insurance of 59.5%. With thisdevelopment, investment of insurance companiestotaled up to Rp4,972 billion, or increased by24.6% at the end of 1990 compared with 29.2%in the previous year. (Table VI.5).

As an indemnity insurance company, PTPTPTPTPTAskrindo’Askrindo’Askrindo’Askrindo’Askrindo’s s s s s main responsibility is to provideinsurance for small-scale investment credit,permanent working capital credit, and workingcapital credit up to Rp75 million as well as othercredits extended to small-scale enterprises. In1990, insurance coverage by PT Askrindoreached Rp4,379.3 billion or increased by65.8% compared with 106.5% in the previousyear. Premiums recorded a total of Rpl02.1billion, or rose by 6.9% compared with 94.1%in the year before, while claims in 1990 reachedRp70.0 billion, a 34.6% increase compared with15.6% in 1989.

PT Asuransi Ekspor Indonesia (PTPT Asuransi Ekspor Indonesia (PTPT Asuransi Ekspor Indonesia (PTPT Asuransi Ekspor Indonesia (PTPT Asuransi Ekspor Indonesia (PTAsei) Asei) Asei) Asei) Asei) is an indemnity insurance company

providing export insurance and export creditguarantee. In 1989/90, for which data isavailable, insurance coverage, premiums, andclaims on export insurance amounted to Rp284.4billion, Rpl.9 billion, and Rpl.7 billionrespectively, while insurance coverage,premiums, and claims on export credit guaranteewere Rp3,596.6 billion, Rp24.9 billion, andRpl49.8 billion, respectively.

Another financial institution engaged inindemnity insurance is the State CorporationState CorporationState CorporationState CorporationState Corporationfor the Financial Development offor the Financial Development offor the Financial Development offor the Financial Development offor the Financial Development ofCooperatives (Perum PKK), Cooperatives (Perum PKK), Cooperatives (Perum PKK), Cooperatives (Perum PKK), Cooperatives (Perum PKK), whose maintask is to cover risks on credits extended bybanks to cooperatives. Since July 1990, insurancefor bank loans to village cooperative units hasbeen covered by Perum PKK. In 1990/91, PerumPKK covered Rp564 billion insurance for Rp608billion bank loans extended to cooperatives. Theamount of premium charged was 2% at themaximum.

3. Financing companies3. Financing companies3. Financing companies3. Financing companies3. Financing companies

A financing company is a company other thanbank and NBFI which provides funds or capitalgoods without directly mobilizing funds from thepublic through demand deposits, time deposits,savings deposits, and promissory notes. Afinancing company is allowed to issue promissorynotes only as a securing of bank loans. By typeof activities financing companies can be groupedinto leasing, venture capital, securities trading,factoring, credit card business, and consumerfinancing.

In the reporting year, the number offinancing companies rose by 18 to 120, eachmay engage in more than one financing activities.There were 120 companies engaged in leasing,

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38 in factoring, 26 in venture capital, 26 incredit card business, and 41 in consumerfinancing. There were 1 state-owned company,83 private national companies, and 36joint-venture companies engaged in leasingactivities.

The main activity of a leasing company leasing company leasing company leasing company leasing company isto provide financing in the form of capital goodson a financing lease or an operating lease forcertain period of time based on scheduledinstallment. In 1990, leasing activities roseremarkably as shown by a significant increasein the total assets from Rp3,090.4 billion toRpll,673.9 billion. The increase was mainlybrought by a sharp rise in the total assets ofstate-owned leasing companies, whose share inthe total assets of all leasing companies jumpedup from 4.1% to 55.3%. The shares of privatenational leasing companies and of joint-ventureleasing companies declined from 26.9% and69.0% to 18.4% and 26.3%, respectively.Activities of leasing companies also rose, asreflected by the growing contract value toRp3,290.4 billion at the end of 1990.

4. Pawnshops4. Pawnshops4. Pawnshops4. Pawnshops4. Pawnshops

By the Government Regulation No. 10, 1990the legal status of Perjan Pegadaian (statePawnshop), whose activity is to provide smallloans to those in financial difficulty, was changedin to Perum Pegadaian. In 1990, pawnshopactivities recorded an increase as reflected inthe higher amount of loans and repayments. Atthe end of 1990 the amount of loans extendedrose by 13.1% to Rp433 billion, and repaymentrose by 11.5% to Rp418 billion. Outstandingloans went up by 11.2% to Rpl09 billion (TableVI.6).

Increased activities of the state pawnshopwere brought about by improvement in theservice and the growing number of its offices.In 1990, the maximum amount of loans extendedwas increased from Rp500 thousand to Rpl,500thousand per collateral, while interest ratesremained between 3% - 4% per month with amaximum maturity of 6 months. The number ofoffices increased by 17, making a total of 505 atthe end of December 1990.

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A. Government Financial PolicyA. Government Financial PolicyA. Government Financial PolicyA. Government Financial PolicyA. Government Financial Policy

To support the achievement of overall targetsof development, in the fiscal year 1990/91 theGovernment continued to adopt a prudent fiscalpolicy stance. The government sector continuedto be directed to increasing revenues andpromoting more efficient and more effectiveexpenditures. As an instrument of policy, thegovernment budget continued to be based on abalanced concept to promote self-support inproviding development funds.

In raising domestic revenues, theGovernment continued to make efforts to increasereceipts both from tax and non-tax sectors. Thoseefforts covered the provision of tax informationservice, imposition of legal sanction on taxdelinquents, improvement of customs,enhancement of the efficiency of state-ownedenterprises, and intensification of non-taxreceipts from ministries/institutions.Furthermore, to expedite the developmentprocess, foreign aid, especially project aid,continued to complement domestic funds.

On the expendi ture s ide , rou t ineexpenditures continued to be directed toimproving the efficiency of governmentopera t ions , p reserv ing deve lopmentoutcomes and price stability, and fulfillingt imely debt amort izat ion and interestpayment ob l iga t ions . Deve lopmentexpenditures were directed mainly toinfrastructures which directly supportedeconomic act ivi t ies , the expansion offacilities to raise people’s standard of living,and the acceleration of human resourcedevelopment.

Concurrent with the government efforts tocontinuously promote development, budgetoutturn has been increasing from year to year. Aseries of government adjustment measures ontaxation, supported by robust economic growth,succeeded in raising various tax receipts withthe result that government receipts from non-oil/gas have surpassed those from oil/gas in the lastfive years.

The government budget for the fiscal year1990/91 was fixed at Rp42.9 trillion or 17.2%higher than the budget and 1.2% higher thanthe outturn in the preceding year. The outturnfor 1990/91 budget reached Rp49.4 trillion orincreased by 23.3%, compared with that in thepreceding year. The larger revenues mainlyoriginated from an increase in domestic receiptsfrom oil/gas and taxes. Meanwhile, the largerexpenditures were mainly allocated to theincreased fuel oils subsidy and to theestablishment of a development budget reserve.It should be noted that in order to supportmonetary stability, a part of the increase in oil/gas receipts was allocated to the developmentbudget reserve. Taking into account the inflationrate of 9.11% in 1990/91, both governmentrevenues and expenditures, in the real terms,increased by 14.2% over those in the precedingyear.

Government savings, representing thedifference between domestic revenues androutine expenditures, reached Rp9.5 trillion in1990/91 or more than double of that in thepreceding year. This brought about an increasein the share of government savings indevelopment financing from 31.9% in 1989/90to 49.1% in the reporting year. In the meantime,

VII. GOVERNMENT FINANCEVII. GOVERNMENT FINANCEVII. GOVERNMENT FINANCEVII. GOVERNMENT FINANCEVII. GOVERNMENT FINANCE

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the share of government savings in GDP formationincreased from 2.5% to 4.9%.

B. Government RevenuesB. Government RevenuesB. Government RevenuesB. Government RevenuesB. Government Revenues

In the reporting year, the outturn ofgovernment revenues, comprising domestic anddevelopment receipts, reached Rp49.5 trillion.Domestic receipts reached Rp39.6 trillion orincreased by 37.6%, compared with the outturnin the preceding year. Meanwhile, actualprogram and project aids amounted to Rp9.9trillion, an increase of 5.1% from the precedingyear (Table VII.2).

Actual oil/gas receipts reached Rpl7.7trillion or 57.4% over that of last year’s outturn.The higher oil/gas receipts was mainly attributedto higher prices of oil in the world market dueto the Gulf Crisis. It could be noted that in thereporting year the average price of Indonesian

crude oil was $22.60 per barrel or higher thanthe $17.76 per barrel realized in 1989/90.Meanwhile, the actual non-oil/gas receiptsreached Rp21.8 trillion or 24.9% higher thanthose in the preceding year. The increase innon-oil/gas receipts reflected the success ofgovernment efforts in promoting receipts fromthe tax sector through tax reform as well asimprovement in the administration of collection.Tax receipts from virtually all categoriesincreased, in particular from income tax,value-added tax (VAT) on goods and services,sales tax on luxuries and import as well as exciseduties.

Actual receipts from income tax in thereporting year reached Rp6.8 trillion or 23.1%higher than those of the preceding year. The risewas mainly attributable to an increase in thenumber of taxpayers. Nevertheless, tax relief wasoffered to selected groups in order to serve social

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CHART 8CHART 8CHART 8CHART 8CHART 8GOVERNMENT REVENUE AND EXPENDITUREGOVERNMENT REVENUE AND EXPENDITUREGOVERNMENT REVENUE AND EXPENDITUREGOVERNMENT REVENUE AND EXPENDITUREGOVERNMENT REVENUE AND EXPENDITURE

(trillions of rupiah)(trillions of rupiah)(trillions of rupiah)(trillions of rupiah)(trillions of rupiah)

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CHART 9CHART 9CHART 9CHART 9CHART 9GOVERNMENT REVENUEGOVERNMENT REVENUEGOVERNMENT REVENUEGOVERNMENT REVENUEGOVERNMENT REVENUE

(trillions of rupiah)(trillions of rupiah)(trillions of rupiah)(trillions of rupiah)(trillions of rupiah)

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objectives. It should be noted that in order topromote the activity of Indonesian scouts andthe Indonesian red cross as well as theconstruction of low-cost housing, since October13, 1990 the Government has postponed theimposition of income tax on interest earned byIndonesian scouts or the Indonesian red crossfrom time deposits, certificate of deposits, and/or savings deposits and on interest earned fromsavings deposits intended for the ownership oflow-cost housing. 1) In addition, to relieve taxburden for the low-income group, in 1990 theGovernment raised the maximum amount ofnontaxable income from Rp2,880,000.00 toRp4,320,000.00 for a family of three children.2)

Receipts originating from VAT and sales taxon luxuries reached Rp7.5 trillion, an increase of27.9% over those in the preceding year. This wasattributable to the growing economic activity andthe broadening of VAT coverage to includewholesalers 3) since April 1989; formerly, the VATwas only collected from main distributors/agents.

Government receipts originating from importduties reached Rp2.5 trillion or increased by56.6%, compared with those in the precedingyear. The substantial increase was mainlyresulted from the increase in imports, concurrentwith rises in investment and production activitiesand the success in combating smuggling.Meanwhile, receipts from excise dutiescomprising duties on tobacco, sugar, and liquorsreached Rpl.9 trillion in the reporting year orincreased by 29.8%, compared with those inthe preceding year. This was mainly caused byrises in the tariffs on tobacco and the sellingfloor prices of sugar and liquors.

Actual receipts from land and building taxin the reporting year was Rp811 billion or37.5% higher than the outturn of last year. Thisrise was mainly attributable to the increase inservices and facilities in tax payment, adjustmentin the classification of sale value of tax objectsto prevailing land and building prices, andimposition of legal sanction on tax evasion.Meanwhile, taxpayers unable to make paymentscontinued to be provided with relief, or evenexemption, from land and building tax. 4)

It is worth noting that the actual export taxcollected in the reporting year only reachedRp44 billion or decreased by 74.3% under thosein the year before. The decrease was caused bythe stipulated export and additional export taxon sawn timber and processed wood which wasintended to foster forest conservation and toincrease exports of wooden finished products.Furthermore, the actual receipts originating fromother taxes comprising stamp and auction dutiesreached Rp243 billion, a decrease of 12.0%from the outturn in the preceding year.Meanwhile, non-tax receipts reached Rp2.1trillion, an increase of 2.6% over the actualamount in the preceding year.

The actual development revenues in thereporting year stood at Rp9.9 trillion or 5.1%higher than those in the preceding year. Therevenues comprised project aid of Rp8.5 trillion,program aid for local-cost financing of Rpl.4trillion, and food aid of Rp35 billion. Theincrease mainly originated from program aid forlocal-cost financing, concurrent with theincrease in government investments formaintaining the momentum of development. C.

1) Government Regulation No. 54/1990, October 13, 1990.2) Minister of Finance Decree No. 1209/KMK.04/1989,

October 31, 1989.3) Government Regulation No.28/1988, December 27, 1988.

4) Minister of Finance Decree No. 158/KMK.04/1991February 13, 1991.

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Government Expenditures 15. In the reportingyear, actual government expenditures comprisingroutine and development expenditures reachedRp49.5 trillion. Routine expenditures rose by23.3% to Rp30.0 trillion, most of which (44.7%)were used for the payment of foreign debtamortization. Meanwhile, developmentexpenditures rose by 40.6% to Rpl9.5 trillion,most of which (43.7%) was project aid (TableVII.3).

C. Government ExpendituresC. Government ExpendituresC. Government ExpendituresC. Government ExpendituresC. Government Expenditures

In the reporting year, actual governmentexpenditures comprising routine anddevelopment expenditures reached Rp49.5trillion. Routine expenditures rose by 23.3% toRp30.0 trillion, most of which (44.7%) wereused for the payment of foreign debt amortization.Meanwhile, development expenditures rose by40.6% to Rpl9.5 trillion, most of which (43.7%)was project aid (Table VII.3).

Personnel expenditures reached Rp7.0trillion representing an increase of 13.8%compared with the outturn in the preceding year.Actual material expenditures also rose, reachingRpl.8 trillion, an increase of 7.5% comparedwith 1989/90. Meanwhile, actual subsidies tolocal governments increased by 18.8% reachingRp4.2 trillion. This was closely related to theincrease in payments for pensions in autonomousregions channeled through PT Taspen.

Amortization and interest payments,constituting the largest expenditures in the fiscalyear 1990/91, amounted to Rpl3.4 trillion, anincrease of 122% over those in the precedingyear. The higher outturn was caused by anincrease in overdue foreign debt and strongercurrencies of donor countries.

Outturn of other routine expenditures rosefrom Rp0.8 trillion in 1989/90 to Rp3.5 trillionin the reporting year. Of that amount, Rp3.3trillion was used for fuel oils subsidies associatedwith higher oil prices in the world market andhigher domestic consumption of fuel oils.

Development expenditures, comprisinglocal-cost financing and project aid, reachedRpl9.4 trillion in the reporting year or 40.6%higher than those in 1989/90. The high outturnbrought about an increase in its contribution inGDP, from 8.0% in 1989/90 to 9.9% in thereporting year. In addition, project aid amountedto Rp8.0 trillion and local-cost financing toRpl0.9 trillion. The local-cost financing was usedto finance the expenditures of ministries andother government institutions of Rp4.9 trillion,various presidential instruction programs ofRp3.0 trillion, and subsidies on fertilizer,government equity participation, and others ofRpl.1 trillion. In addition, particularly in thereporting year, a development budget reserve ofRp2.0 trillion was allocated as safeguard againstfuture shortfalls in government revenues.

By sec to r, mos t deve lopmentexpenditures continued to be allocated tofinance the economic sector, namely 45.1%amounting to Rp8.8 tr i l l ion or 19.3%higher than those in the year before.Expenditures for regions, businesses, andliving environment rose by 13.9% reachingRp2.8 t r i l l i on ; i t i s in l ine wi th theGovernment’s effort to achieve a balanceddistribution of development. Meanwhile,expenditures for education and culture roseby 41.7% reaching Rp2.6 t r i l l ion ; i treflected Government’s effort to promotethe quality of human resources (TableVII.4).

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D .D .D .D .D . Government Budget for Fiscal YGovernment Budget for Fiscal YGovernment Budget for Fiscal YGovernment Budget for Fiscal YGovernment Budget for Fiscal Yearearearearear

1991 /921991/921991/921991/921991/92

In fixing the budget for fiscal year 1991/92,the Government continued to adhere to thebalanced budget principle. With the aim ofcontinuously promoting economic growth andmaintain price stability as well as foster incomedistribution, the Government continued toimplement measures to enhance efficiency andto allocate expenditures to high priority sectorsand activities. The government budget for1991/92 (the third year of the Fifth Five-yearDevelopment Plan) was fixed at a balance ofRp50.6 trillion or 2.2% higher than the budgetoutturn in the reporting year. Domestic revenueswere budgeted at Rp40.2 trillion or increasedby 1.6% compared with the outturn in thisreporting year, comprising oil/gas receipts ofRpl5 trillion and non-oil/gas receipts of Rp25.2

trillion. Development revenues were budgetedat Rpl0.4 trillion, comprising project aid ofRp8.8 trillion and program aid for local-costfinancing of Rpl.5 trillion. Routine expenditureswere budgeted at Rp30.6 trillion, an increaseof 1.9% over the outturn in the reporting year,mostly (47.1%) would be used for amortizationand interest payments of Rpl4.4 trillion.

Government savings was expected toreach Rp9.6 trillion or 0.8% higher thanthe ou t tu rn in the repor t ing year.Concurrently, development expenditureswere budgeted a t Rp20.0 t r i l l ion , anincrease of 2.8% from the outturn in therepor t ing year. The a l loca t ion o fdevelopment expenditures continued to bedirected toward achieving economic growth,creating job opportunities, and reducingdisparities in regional growth.

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Indonesia’s balance of payments wasinfluenced by various factors, both internal andexternal during the reporting year. The rapidgrowth of domestic demand boosted significantlythe demand for imported goods, especially capitalgoods and raw material, as well as the demandfor exportable goods thereby affecting adverselythe export performance. The high domesticinterest rate following the adoption of tightmonetary policy stance since the second quarterof the reporting year had induced an influx ofnet private capital inflow, by banks as well asnon-banks, surpassing that of official capital.Especially for the capital inflow by bank, it wasfacilitated by the removal of the ceiling onoffshore borrowing by banks. At the external side,several factors, such as the slowdown in thegrowth of the world economy and trade, thedeterioration in the prices of several primarycommodities and continuing protectionistmeasures taken by the industrial countriescontributed to the slackening of non-oil/gasexports growth. The rise in oil prices during the3rd and 4th quarter following the Gulf crisisboosted oil/gas exports significantly. On the otherhand, the Gulf crisis also brought aboutunfavorable consequences for non-oil/gas exports,especially to the Middle East region, and thetourism sector during the period. It could beadded that before the end of the Gulf crisis, therewas an upheaval of speculation in foreignexchange arising from undue concerns about theweakening of oil prices which prompted theGovernment to shift the deposits of state enterprisesin commercial banks to Bank Indonesia. With thosedevelopments, the current account deficit widenedsignificantly, but it was offset by the higher netcapital inflow. Hence, the overall balance ofpayments recorded a significant surplus.

A. Balance of Payments PolicyA. Balance of Payments PolicyA. Balance of Payments PolicyA. Balance of Payments PolicyA. Balance of Payments Policy

A series of deregulation policies taken sincethe early 1980s which were supported by prudentmacro economic policies have combined to bringabout positive impacts on Indonesia’s balance ofpayments in the past few years. The policies havestrengthened the structure of Indonesia’s balanceof payments which was reflected in the furtherlowering of dependence on oil/gas exports. Aswas the case with the preceding years, thebalance of payments policies were consistentlydirected to obtaining sustainable balance ofpayments by continuously promoting non-oil/gasexports. For that purpose, the Governmentcontinuously made an effort to expandinvestment and production in export activities,while offering a wider role for the private sector.To achieve this objective, the government iscontinuously adhering to a free foreign exchangesystem, while continuing a managed floatingexchange rate policy to maintain thecompetitiveness of exports in the internationalmarket as well as domestic products againstimported goods. In addition, the balance ofpayments policy formed a part of an overall policyframework encompassing policies in monetary,fiscal and real sectors.

Concerning exports, exports, exports, exports, exports, in the reporting yearthe Government continuously madeimprovements in export procedures, qualitycontrol and taxation. As regards trade regulation,to provide wider opportunities for the businesscommunity in taking advantage of opportunitiesin the international market, the Governmentremoved the regulation requiring exporters touse Marketing Board of Indonesian CoffeeExporters in carrying out their exports. In

VIII. BALANCE OF PVIII. BALANCE OF PVIII. BALANCE OF PVIII. BALANCE OF PVIII. BALANCE OF PAAAAAYMENTSYMENTSYMENTSYMENTSYMENTS

80

addition, the Government also revoked theregulation which prohibited exports ofcommodities made of certain luxurious woods.1)

In the meantime, to make an optimum use andto ensure a fair distribution of quota for textileand textile products, exporters who fail to fulfilltheir quotas will be subject to quota reductionand conversely additional quota might be grantedfor more capable exporters.2) In the meantime,to expand markets and to insure the fulfillmentof quota for dried cassava exported to theEuropean Community (EC) countries, the formulafor quota distribution was revised with anobjective to encourage export to countriesoutside the EC.3)

To insure the continuity of marketing and tomaintain competitiveness of Indonesia’s exportcommodities, especially fishery products, theGovernment took measures to expedite qualitytesting procedure of fresh and frozen fish forexport. The measure includes, among others,allowing private sector to administer the testwithout ignoring the quality.4) Meanwhile, to assurethe quality and international reputation for exportedcacao seeds, it has been decided that onlyfermented cacao seeds will be allowed for export.5)

In an effort to promote exports of finishedgoods made of woods thereby encouraging thedevelopment of downstream industry, and tocreate more value added domestically, theGovernment increased export tax on certaincategories of sawn timber and unprocessed woods.Meanwhile for 15 categories of processed wood

products, they are no longer required to payexport tax.6)

Regarding imports, imports, imports, imports, imports, the Government hasimproved the policies related to importregulation and excise tax. As regards importregulation, the Government removed theregulation on imported goods for industry. Thestep was aimed at improving the distribution ofgoods for domestic needs, and providing a fairprotection for production activity.7) Furthermore,to meet domestic demand for completely builtup trucks which was previously subject to importprohibition, the Government allowed truckimports with lower tariff.8)

In the area of tariff, with a view to promotingthe development of industrial and health sectors,improvement were made in the classification ofthe 1986 Guide on the Rates of Import Duties andchanges for the rate of import duties and additionalimport duties for certain goods.9) In addition, tomeet the demand for production activities, theimports of diesel engines were exempted fromimport duties provided the engines were used togenerate electricity for industry and industrialestate.10) Further, to provide a fair protection andto satisfy the demand by domestic industry, theGovernment made some changes for import dutiesand additional import duties on some importedcommodities.ll)

1) Minister of Trade Decress No. 140/Kp/V/90 and No. 146/Kp/V/90, May 28, 1990.

2) Minister of Trade Decree No. 224/Kp/lX/90 September 21,1990.

3) Director General of Foreign Trade Decree, No 1298/ DAGLU/Kp/XI/90, November 8, 1990.

4) Presidential instruction No. 2 of 1990, May 28, 1990.5) Director General of Foreign Trade Degree, No. 204/DAGLU/

Kp/III/90, March 14, 1990.

6) Minister of Finance Decree No 1223/KMK.013/1990, March14, 1990.

7) Minister of Trade Decree No 147/Kp/7/90, May 28, 1990.8) - Minister of Trade Decree No. 255/Kp/X/90, October 27

1990.- Minister of Finance Decree No. 1345/KMK.00/1990, October

30, 1990.9) Minister of Finance Decree No. 618/KMK.00/1990, May 28,

1990.10)Minister of Finance Decree No. 82/KMK.00/1991, January

24, 1991.11)- Minister of Finance Decree No. 478/KMK.00/90, April 17

1990.- Minister of Finance Decree No. 507/KMK.00/1990, April

30, 1990.- Minister of Finance Decree No. 618/KMK.00/1990,

May 28, 1990.

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In the area of services, services, services, services, services, the Governmentcontinued its efforts to promote the generatingand the efficient use of foreign exchange. In aneffort to increase foreign exchange earnings, theGovernment continued to promote the growthand development of tourism sector throughpromotion, among others, by declaring the year1991 as the Visit Indonesia Year. Furthermore,to establish a transparent legal basis forconducting activity, the Tourism Act had beenissued which specifies the activities covered inthe tourism sector.12) In addition, to furtherenhance the efficiency in the use of foreignexchange for productive activity and at the sametime to raise government revenues, since July1990 it has been determined that the exit permitfee by sea is Rp100.000.13) In the area ofmanpower, the Government improved theregulation which limits the employment of foreignworkers and encouraged training and educationprogram for Indonesian workers.14)

In the area of capital flowcapital flowcapital flowcapital flowcapital flow, , , , , the Governmentcontinued to encourage foreign capital inflow asa resources for financing development thatcomplements domestic financing. The foreigncapital consists of official borrowing, borrowingby state enterprises and private borrowers andforeign direct investment. As regards officialborrowing, the Government continuously adopteda prudent policy on foreign borrowing, by givingpriority to soft term, untied borrowing,considering the ability to repay, and using the

funds for productive projects in accordance withthe development plan, therefore it will not put aburden for balance of payments in the future.Meanwhile, in the area of private capital inflow,the Government continued to enhance the roleof private sector and to encourage its uses inproductive activity.

With a view, to promoting investment, theGovernment simplified the procedure for theprocurement of capital goods included in themaster list. The step was taken by allowingprocurement through a domestic leasingcompany. To prepare a climate conducive forinvestment in the Eastern Part of Indonesia, someincentives were granted to companies investingin certain fields including export orientedactivities, among others, by way of concessionaryincome tax and lower land and building taxes.

B. Balance of Payments DevelopmentB. Balance of Payments DevelopmentB. Balance of Payments DevelopmentB. Balance of Payments DevelopmentB. Balance of Payments Development

During the reporting year, Indonesia’s Balanceof Payments showed a substantial surplus, althoughit was characterized by a widening current accountdeficit which reached more than double that ofthe preceding year. The widening current accountdeficit was caused mainly by a declining of thetrade balance surplus. On the export side, it wascharacterized by a weakening export growth,although oil/gas exports was increased, while onthe import side, it was characterized by high importgrowth. At the same time the deficit on serviceaccount rose sharply. Capital account showed alarge surplus resulting mainly from a surge ofprivate capital inflow. With the surplus of balanceof payments, foreign exchange reserve in BankIndonesia increased by a significant amount.

The growth of non-oil/gas export deceleratedfrom 19.0% to 6.1% during the reporting year,

11) - Minister of Finance Decree No. 478/KMK.00/90,April 17 1990.- Minister of Finance Decree IN’o. 507/KMK.00/1990,April 30, 1990.- Minister of Finance Decree No. 618/KMK.00/1990,May 28, 1990.

12) Tourism Act. No. 9 of 1990, October 18, 1990.13) - Presidential Decree No. 28 of 1990, July l, 1990.

- Minister of Finance Decree No. 768/KMK.04/1990,July 14, 1990.

14) Minister of Manpower Decree No. KEP-416/MEN/90,August 2, 1990.

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while the value of oil/gas export increased by36.7% compared with 22.2% during thepreceding year which was caused mainly by therise in oil prices as a result of the Gulf crisis.However, non-oil/gas export continued to havethe biggest share in total export. Thisachievement indicated the government’s successin reducing the dependence on oil/gas exportsthrough increasing non-oil/gas exports.

Low growth in industrial countries and theslowdown in the growth of world trade volume,which was followed by a deterioration in theinternational prices of primary commodities wereamong the factors responsible for the weakeningof the growth of non-oil/gas export. In addition,the Gulf crisis since August 1990 was also thefactor which affected adversely the growth ofnon-oil/gas exports, especially to the MiddleEast. Another factor which also contributed tothe slackening of non-oil/gas export growth wasa rise on domestic demand for certain exportableproducts. In addition, the imposition of highexports tax for sawn timber and otherunprocessed woods has decreased exports ofwood and wood products temporarily.

Increasing production and investmentactivities by private sector in the past two yearswere the main factors which led to the increasein import growth by 32.5% compared to 21.4%in the previous year. This substantial increaseoccurred in the imports of capital and rawmaterial goods. In addition, the fast growth ofimport was caused by government policies whichsimplified the imports procedures and loweredimport duties on industrial commodities. Thepolicy was aimed at improving thecompetitiveness and the availability of suppliesfor domestic economic activity. On the other side,

the monetary tightening by the Government sincethe middle of 1990 had been able to slowdownimport growth from further accelerating whichwas evident in the monthly import for the lastquarter of the reporting year. With thatdevelopment, the trade surplus in 1990/91decreased from $6,456 million to $5,115million.

The deficit of the services account increasedfrom $8,055 million to $8,856 million in thereporting year which was caused mainly by theincreasing freight on import and the payment ofinterest on foreign debts. As a consequencecurrent account deficit widened from $1,599million to $3,741 million. Hence, the ratio ofdeficit to GDP increased from 1.7% to 3.5%which reflected the need of foreign fund tocomplement the requirement for developmentfinancing.

The surplus on capital account increasedsignificantly mostly as a result of higher privatecapital inflow. The development made the roleof private sector in financing current accountdeficits larger than that of official capital inflow;it was a first occurrence during the first periodof the long range development plan. Off-shoreborrowing by banks which had important rolein financing private sector activity increasedsignificantly. This was related with the highdomestic interest rates and the removal of theceiling on the offshore borrowing, besides theavailability of swap facility by Bank Indonesia.In addition, foreign direct investment andoffshore borrowing by private non-bankincreased significantly in line withcontinuously improving investment climatedomestically, besides the high level ofdomestic interest rates.

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CHART 10CHART 10CHART 10CHART 10CHART 10INTERNAINTERNAINTERNAINTERNAINTERNATIONAL TRADETIONAL TRADETIONAL TRADETIONAL TRADETIONAL TRADE

(millions of $)(millions of $)(millions of $)(millions of $)(millions of $)

85

CHART 11CHART 11CHART 11CHART 11CHART 11NET CAPITNET CAPITNET CAPITNET CAPITNET CAPITAL INFLOWS CURRENT ACCOUNTAL INFLOWS CURRENT ACCOUNTAL INFLOWS CURRENT ACCOUNTAL INFLOWS CURRENT ACCOUNTAL INFLOWS CURRENT ACCOUNT

(billions of $)(billions of $)(billions of $)(billions of $)(billions of $)

CHART 12CHART 12CHART 12CHART 12CHART 12TRADE AND CURRENT ACCOUNTTRADE AND CURRENT ACCOUNTTRADE AND CURRENT ACCOUNTTRADE AND CURRENT ACCOUNTTRADE AND CURRENT ACCOUNT

(billions of $)(billions of $)(billions of $)(billions of $)(billions of $)

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1. Exports1. Exports1. Exports1. Exports1. Exports

During 1990/91, export value increased by18.1% reaching $28.143 million, mainly as aresult of higher oil/gas exports. Meanwhile, thegrowth of non-oil/gas exports declined from19.0% in 1989/90 to 6.1%. Much of thislow-growth resulted from the unfavorable marketconditions for primary commodities, especiallymining commodities. The exports of miningcommodities showed a declined by 11.5%compared with 1.9% during the previous year.Meanwhile, the export growth of agriculturalcommodities increased by 8.1% compared with12% for the preceding year.

The slackening of growth for non-oil/gasexports in 1990/91 was mainly attributable tothe decline in the world’s primary commodityprices of 7.9% compared to a decline of 1.7%in the preceding year and the deceleration inthe growth of world’s trade volume of 3.9%compared to 7.3% during the previous year. Inaddition to those two factors, the Gulf crisis hada depressing impact on non-oil/gas exports. Forexample, exports to Middle East countries whichpreviously increased by 81.4%, in the reportingyear, increased only by 17.6%.

Another factor which adversely affected thegrowth of non-oil/gas exports was the increasein domestic demand. The high rate of economicactivity stimulated an increase in domesticdemand for several exportable commodities, suchas cement and steel. Export value for the twocommodities decreased respectively by 42.9%and 38.9% compared with the export values ofthe preceding year. In addition, the disruptionin the production activity of mining commoditiessuch as nickel and aluminum also led to thelower export values for these commodities.

Agricultural exports Agricultural exports Agricultural exports Agricultural exports Agricultural exports which increasedsignificantly in 1990/91 included shrimp, andother animal products; overall, exports for thiscategory increased by 41.6%, to $1.106 million.This increase primarily due to shrimp exportswhich rose by 38.7% to $721 million; thisperformance was largely attributable to a rise inworld market prices. Other agriculturalcommodities which got an increase are, amongothers, tapioca and food stuff with the growthrate of 17.5% and 25.6% respectively, reaching$114 million and $314 million, the increaseswere also due mainly to higher price increases.

By contrast, exports of major traditionalagricultural commodities such as, natural rubber,coffee, tea and pepper declined in 1990/91. Thevalue of natural rubber exports decreased by5.7% compared to the previous year, to $901million. This was mainly caused by theweakening of prices while export volumeexperienced an increase. The value of coffeeexport also continued to decline reaching a levelof $366 million in 1990/91, again due to a lowerprices. The collapse of the quota system underthe International Coffee Agreement brought abouta depressing effect on world coffee price becauseit created excess global supplies. Similarly, thevalue of tea exports, which had risen in 1989/90declined by 15.0% to $154 million in 1990/91.This outcome was caused by declines in bothvolume and price, which were related to lowerworld demand, especially from some MiddleEastern countries. The value of palm oil exportexperienced a slight increase to $282 million, dueto higher export volume. As in the previous year,the price of palm oil in the world market decreaseddue to excess world supply. In 1990/91, the valueof pepper exports only reached $77 million, adecrease of 18.1% compared with the previousyear’s, which was caused by lower market prices.

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The export value of mining commoditiesmining commoditiesmining commoditiesmining commoditiesmining commoditiesexperienced a decline of 11.5%. The declineoccurred in several important miningcommodities such as tin, nickel, aluminum, andgold; copper was an exception with its valueincreasing by 39.1%. The value of tin exportdecreased by 21.6% which was mainly causedby lower prices in international market, whileexports of nickel and aluminum declined by29.0% and by 24.3% respectively due mostlyto lower volumes on account of interruption inthe production process as well as lower prices.Similarly, the value of gold exports experienceda 68.8% drop which reduced its value from $218million in 1989/90 to $68 million in 1990/91.

During the reporting year, the growth in thevalue of manufactured exports manufactured exports manufactured exports manufactured exports manufactured exports decreased from42.0% to only 8.2%. This was mainly causedby capacity constraint for some manufacturingindustries; export supply was also constrainedby diversion of supply of some commodities suchas cement and steel to meet domestic demand,in line with the expanding economic activity andsociety’s income. Although non-oil/gas exportsgrowth was lower than that of oil/gas, the shareof non-oil/gas exports in the reporting year,remained higher than that of oil/gas exports.

As a consequence of the imposition of thehigh tax rate on sawn timber exports, earningsfrom exports of sawn timber, which reached $600million in 1989/90, shrank to only $87 million.An increase in exports of wood products otherthan plywood from $416 million to $572 millionprovided only partial offset; while this policyhas had a short term effect of reducing aggregateexport earnings from wood and wood products,in the long run, it is intended to raise aggregateearnings by encouraging the growth of domesticwood industry in order to increase industry’s

value added and in turn it can increase exportsof wood and wood products. Meanwhile theexports of plywood increased further from $2.438million to $2,764 million in the reporting year.

Export of manufacturing goods whichcontinued to increase included textiles,handicrafts, electronics and footwear. This wasrelated to efforts to improve competitiveness byimproving production efficiency, enhancingquality, reducing import tariff for certaincategories of raw material required to produceexportables and simplifying exports/importprocedures.

Exports of textile and garments expandedrapidly, by 23.1% to $2,731 million. It can beadded that for the most part textile exports werestill directed to the US, Singapore, Japan, andME countries. Exports of certain categories ofgarment exported to the US had used up theavailable quota. Exports of handicrafts andelectronics products increased, respectively by39.9% to $350 million and by 41.5% to $249million. Meanwhile, exports of footwear weremore than doubled reaching a value of $648million.

During the reporting year, oil exportsoil exportsoil exportsoil exportsoil exportsincreased substantially, i.e. by 28.1%, reaching$8.053 million which primarily as a result of asubstantial price increase. The average price forcrude oil during the reporting year increased by25.5% reaching $22.46 per barrel. Theprice-rise was closely related with the Gulfcrisis, which led to the concerns about globalsupply shortages.

Before the outbreak of the Gulf crisis, theprice of Minas crude oil in July 1990 was $14.81per barrel. Following the outbreak, the oil prices

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CHART 13CHART 13CHART 13CHART 13CHART 13THE SHARES OF EXPORTED COMMODITIESTHE SHARES OF EXPORTED COMMODITIESTHE SHARES OF EXPORTED COMMODITIESTHE SHARES OF EXPORTED COMMODITIESTHE SHARES OF EXPORTED COMMODITIES

3.000

1986/87 1987/88 1988/89 1989/90 1990/91

2.500

2.000

1.500

1.000

500

0

CHART 14CHART 14CHART 14CHART 14CHART 14UNIT PRICES OF SELECTED EXPORT COMMODITIESUNIT PRICES OF SELECTED EXPORT COMMODITIESUNIT PRICES OF SELECTED EXPORT COMMODITIESUNIT PRICES OF SELECTED EXPORT COMMODITIESUNIT PRICES OF SELECTED EXPORT COMMODITIES

($ / ton )($ / ton )($ / ton )($ / ton )($ / ton )

90

91

92

CHART 15CHART 15CHART 15CHART 15CHART 15THE SHARE OF NON-OIL/GAS EXPORTED COMMODITIESTHE SHARE OF NON-OIL/GAS EXPORTED COMMODITIESTHE SHARE OF NON-OIL/GAS EXPORTED COMMODITIESTHE SHARE OF NON-OIL/GAS EXPORTED COMMODITIESTHE SHARE OF NON-OIL/GAS EXPORTED COMMODITIES

CHART 16CHART 16CHART 16CHART 16CHART 16THE EXPORTS OF WOODS AND WOOD PRODUCTSTHE EXPORTS OF WOODS AND WOOD PRODUCTSTHE EXPORTS OF WOODS AND WOOD PRODUCTSTHE EXPORTS OF WOODS AND WOOD PRODUCTSTHE EXPORTS OF WOODS AND WOOD PRODUCTS

(millions of $)(millions of $)(millions of $)(millions of $)(millions of $)

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rose steadily, reaching its peak level of $35.29per barrel in October 1990. Along with the oilprice increase, Indonesia was able to increaseits oil production to an average of 1,511thousands barrels per day compared with 1.411thousands barrels per day in the previous year.However, the increase in oil price was short livedas the OPEC countries agreed to freeze theproduction quota, and industrial countriesreleased stocks from oil reserves. As a result inMarch 1991 the oil price had dwindled down to$17.72 per barrel.

Meanwhile, the oil exports volume onlyincreased by 2.6% compared with the previousyear’s increase of 4.5%. The decrease in volumegrowth was related to the increased in domesticoil-fuel consumption, which grew by 14.0%compared with 5.5% for the previous year. As aresult, domestic consumption in 1990/91reached 208.2 million barrel. Much of the stronggrowth in domestic oil consumption wasaccounted for by the expansion of domesticeconomic activities, especially in thetransportation and industrial sectors.

In line with the oil price movements, duringthe reporting year the prices of LNG and LPG,which are linked with oil prices also increased,respectively by 34.8% and 50,7%, reaching$3.91 per MMBTU and $154.81 per MT. Inaddition, the export volume of LNG and LPGalso showed an increase, respectively from 967million MMBTU and 2,414 million MT to 1,027million MMBTU and 2,602.0 million MT in thereporting year. The increase was the result ofthe strong demand by Japan as the main LNGand LPG importer from Indonesia, and thebeginning of LNG exports to Taiwan. Theincrease of price and export volume brought abouta significant rise of LNG and LPG export values

during the reporting year, i.e. from $3.049million to $4,710 million.

With those developments, during thereporting year, earnings from oil/gas exportsincreased by 36.7% to $12,763 million. Bycountry of destination, Japan and the UScontinued to be the main destinations ofIndonesia’s oil exports, while gas was mainlyexported to Japan, South Korea and Taiwan.

2. Imports2. Imports2. Imports2. Imports2. Imports

During 1990191 import rose by 32.5% to$23,028 million due to the increase in both oil/gas and non-oil/gas imports. Non-oil/gas importsincreased sharply in line with the high rate ofdomestic economic expansion as reflected insignificant growth of investment and production.The increase of imports for capital goods wasclosely related with the increase in domesticinvestment activity while import of raw/auxiliarymaterials was needed to support the expansionof production activities. The increase in importswas facilitated by the availability of foreignfinancing, which was obtained both directly bythe companies or indirectly through the bankingsector. Along with the increase of capital goodsimports, import of consumption goods also showedan increased as domestic income rose. It is worthnoting that tight monetary policy, which aimedat dampening domestic demand and inflationarypressure had a positive impact in preventingfurther acceleration in the growth of import asreflected in gradual decrease of monthly importgrowth by the end of the fiscal year.

Import of capital goods showed a remarkableincrease of 64.8% which increased its share intotal import from 24.2% in 1989/90 to 30.1%in 1990/91. The imported capital goods, which

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partly consisted of industrial machineries fortextile and footwear industries, was related tothe relocation of some industries from Japan andNewly Industrialized Countries (NIE’s).

Imports of raw and auxiliary materials alsoexperienced an increase of 22.9%, a slower growthrate than in the preceding year bringing about itsshare in total import decreased from 70.4% to65.3% in 1990/91. The slower growth rate ofimported raw material and auxiliary goods waspartly related to nearly full capacity utilization insome industries. However, as capital investmentgrew strongly in recent years under the PMA andPMDN schemes, imports of raw materials andauxiliary are expected to rebound in near future.

Imports of consumer goods also increasedwhich resulted partly from the increase in domesticincome as GNP showed a significant increase in1990. Imports of nonfood stuff rose while importsof foodstuff declined leading to a decrease in theshare of imported consumption goods in total importfrom 5.4% to 4.6% in 1990/91. 36. Imports byoil/gas companies rose by 41.6% to $3.580

million, consisting mainly of crude oil and oil fuelimports; the rise was due to an increase of bothvolumes and prices. The increase in import volumewas attributable to increasing domesticconsumption of oil fuel.

By country of origin, Japan and the UnitedStates were the main suppliers of Indonesia’simports with shares of 25.0% and 11.3%respectively, whereas the shares of the EC andASEAN countries were 18.4% and 8.9%respectively. Among the ASEAN countries,Singapore still accounted for the biggest share, of75.4%, followed by Malaysia, Thailand, and thePhilippines with respective share of 13.4%, 9.3%,and 1.9%.

3. Services account3. Services account3. Services account3. Services account3. Services account

During 1990/91, the deficit in the servicesaccount increased significantly by 9.9% to$8,856 million which was mainly due to theincrease in interest payment and freight costs.Net interest income from foreign exchangedeposits by foreign exchange banks decreased

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CHART 17CHART 17CHART 17CHART 17CHART 17THE ATHE ATHE ATHE ATHE AVERAGE MONTHLVERAGE MONTHLVERAGE MONTHLVERAGE MONTHLVERAGE MONTHLY PRICES OF INDONESIAN OIL EXPORY PRICES OF INDONESIAN OIL EXPORY PRICES OF INDONESIAN OIL EXPORY PRICES OF INDONESIAN OIL EXPORY PRICES OF INDONESIAN OIL EXPORTS, MINASTS, MINASTS, MINASTS, MINASTS, MINAS

($/barrel )($/barrel )($/barrel )($/barrel )($/barrel )

96

CHART 18CHART 18CHART 18CHART 18CHART 18EXPOREXPOREXPOREXPOREXPORT BY COUNTRT BY COUNTRT BY COUNTRT BY COUNTRT BY COUNTRY OF DESTINAY OF DESTINAY OF DESTINAY OF DESTINAY OF DESTINATIONTIONTIONTIONTION

(percentage)(percentage)(percentage)(percentage)(percentage)

97

compared with that of the previous year asforeign borrowing of the banking sectorincreased. On the other hand, foreignexchange earnings from tourism continued toincrease in spite of a temporary decline oftourist arrivals during the last quarter of1990/91 due to the Gulf crisis.

The services account deficit of oil/gascompanies rose from $2,897 million in 1989/90to $3,173 million due to the widening deficit ofthe services account of gas companies from $128million to $1.390 million and that of oilcompanies from $148 million to $1,783 million.The latter deficit was related to the increase ofoil prices in the world market and to the higherdomestic oil production as well.

The services account deficit of non-oil/gassector increased by $525 million to $5,683million mainly due to the higher freight costswhich increased by 33.6% to $2,519 million.Other factors contributing to the increaseincluded interest payment on government foreignborrowing which rose from $2,516 million in1989/90 to 52,639 million in 1990/91.

On the revenue side, tourism sectorcontinued to provide a significant contributionto the foreign exchange earnings; othercontributors included foreign investment incomeof domestic banks and income transfer fromIndonesian workers abroad. In 1990/91, foreignexchange earnings from tourism increased by34.9% to $2,199 million, in line with thegovernment promotional efforts.

4. Capital movements4. Capital movements4. Capital movements4. Capital movements4. Capital movements

In 1990/91, net capital inflows whichconsisted of official and private capital,increased sharply from $2,405 million to $6,780million; of the latter, an amount of $5.856 millionwas in the form of net private capital comparedwith only $575 million in the previous year.Substantial growth of domestic investment duringthe financial year was a major factor leading tothe increase in private capital inflow. While tightmonetary policy had succeeded in dampeningforeign exchange speculation and reducinginflationary pressure, it also caused a rise indomestic interest rates a development thatresulted the demand by private sector for foreign

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borrowing. The increase of capital inflow bybanking sector was facilitated by the issuanceof Government policy of 1989 which removedthe ceiling on foreign borrowing by the bankingsector. During the same period, net officialcapital inflow dropped by 49,5%, due to both adecrease in the disbursement of commercial loansand an increase in principal repayment.

4.1. Official capital movements4.1. Official capital movements4.1. Official capital movements4.1. Official capital movements4.1. Official capital movements

Official capital inflow decreased from $1,830million to $924 million in 1990/91 resulting froma 14.7% reduction in the disbursement of thespecial assistance to $1,542 million ascommitment for special loans approved in IGGImeeting in 1990 decreased. Meanwhile,disbursement of project aid in the forms of softloans increased from $2,300 million to $2,766million and disbursement of other project aid inthe form of export credit facilities increased to$621 million. Also, the disbursements ofcommercial borrowings declined from $818million to only $77 million in 1990/91. Thisdevelopment was partly due to the improvementin the international reserves position of BankIndonesia and was in line with the Government’s

policy to limit the use of commercial loans.

In 1990/91 amortization payments on officialforeign debt increased from $3,686 million to$4,082 million. Taking into account interestpayment in the same period, total debt servicepayment grew from $6,202 million to $6,721million. In spite of this increase, debt serviceratio (DSR), defined as the ratio of principaland interest payments on official debt tomerchandise export receipts, dropped from26.0% to 23.9% mainly as a result of theincreased export earnings from $23,830 millionto $28,143 million. Taking into account theexport of services, DSR is shown to havedecreased to 21.7% compared with 23.7% inthe previous year. This development was in linewith the Government’s prudent policy on foreignborrowing by giving priority to soft-termborrowing and considering the capacity to repay.

At the end of March 1991, outstandingexternal government debt increased to $44,876million, mostly due to the depreciation of theUS dollar against most major currencies. Thegovernment’s external debt is primarilydenominated in the US dollars with a share of

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CHART 19CHART 19CHART 19CHART 19CHART 19IMPORTS BY COUNTRY OF ORIGINIMPORTS BY COUNTRY OF ORIGINIMPORTS BY COUNTRY OF ORIGINIMPORTS BY COUNTRY OF ORIGINIMPORTS BY COUNTRY OF ORIGIN

(percentage)(percentage)(percentage)(percentage)(percentage)

100

42.9% and the Japanese yen (38.5%). Withrespect of the source of credit, the largest portion(82.3%) of the government total borrowingoriginated from the IGGI members comprisingbilateral arrangements of $23,035 million, inparticular from Japan, the United States, andGermany, and multilateral institutions of $13,912million mainly from the World Bank and AsianDevelopment Bank. At the 33rd IGGI meetingheld in The Haque in June 1990, it was agreedthat the amount of financial assistance forIndonesia would be $4,751 million, including

special assistance of $1,278 million. The amountconsisted of bilateral assistance of $2,206 millionand multilateral assistance of $2,545 million.At the end of March 1991, outstanding debt formnon-IGGI members was $6,749 million, most ofwhich (73.3%) was obtained from internationalcommercial banks. Classified with respect toterms of borrowings, the debt under OfficialDevelopment Assistance (ODA) amounted to$29,750.2 million (66.3%) which consisted ofprogram aid in the form of food aid (pureprogram) amounting to $2,104 million, program

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aid in the form of special assistance amountingto $3,200 million, and project aid of $24,446million. Outstanding debt under non-ODA termsamounted to $15,126 million, consisting ofspecial assistance, partly obtained from the EximBank of Japan ($2,364 million), borrowingwithin the framework of export credit facilitiesamounting to $7,813 million, and commercialborrowings amounting to $4,949 million.

4.2. Private capital movements4.2. Private capital movements4.2. Private capital movements4.2. Private capital movements4.2. Private capital movements

In 1990/91, net inflow of private capitalshowed a tenfold increase to $5,856 millioncompared with $575 million in previous year. Theinflow of private capital comprising capital flowsof PMA companies and non-PMA companies rosefrom $2,755 million to $8,211 million mainly dueto the sharp increase of non PMA capital inflowamounting to $6,382 million, compared with$1,684 million in 1989/90. Higher capital inflow

brought in by non-PMA companies were mainlyaccounted for by foreign borrowing of the bankingsector and other private companies, as well aspurchases of stocks by foreign investors in the stockmarket. Meanwhile, net capital inflow of PMAcompanies also rose from $1,071 million to $1,849million in line with the increase in investmentapproval in previous years. In 1990, theGovernment approved investment proposals ofPMA with a value of $8,750 million comparedwith $4,719 million in the previous year. In theother direction, private capital outflow slightlyincreased from $2,127 million to $2,286 million,mainly as a result of increased amortization ofprivate foreign debt.

5 .5 .5 .5 .5 . Developments of debt from interna-Developments of debt from interna-Developments of debt from interna-Developments of debt from interna-Developments of debt from interna-

tional institutionstional institutionstional institutionstional institutionstional institutions

In 1990/91, International Bank forReconstruction and Development (IBRD)

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CHART 20CHART 20CHART 20CHART 20CHART 20THE REVENUE AND NUMBER OF TOURISTSTHE REVENUE AND NUMBER OF TOURISTSTHE REVENUE AND NUMBER OF TOURISTSTHE REVENUE AND NUMBER OF TOURISTSTHE REVENUE AND NUMBER OF TOURISTS

ENTERING TO INDONESIAENTERING TO INDONESIAENTERING TO INDONESIAENTERING TO INDONESIAENTERING TO INDONESIA

103

CHART 21CHART 21CHART 21CHART 21CHART 21NET CAPITNET CAPITNET CAPITNET CAPITNET CAPITAL INFLOWSAL INFLOWSAL INFLOWSAL INFLOWSAL INFLOWS

(millions of $)(millions of $)(millions of $)(millions of $)(millions of $)

104

approved new loans to lndonesia in the amountof $1,339.5 million compared with $2,070.5million in 1989/90 so that cumulative loansextended to Indonesia reached to $14,045.2million by the end of March 1991. At the sametime, of the approved loans with an amount of$10,170.1 million had been disbursed; at the endof 1990/91 the outstanding IBRD loans toIndonesia amounted to $9,373.6 million. The loanswere used to finance various projects, involvingvarious sectors, namely transportation, electricity,irrigation, communication, agriculture, ruraldevelopment, and export promotion.

Meanwhile, outstanding borrowings fromInternational Development Association (IDA)amounting to $842,4 million at the end of

1990/91. It is worth noting that Indonesia hasbeen classified as being not eligible for assistancefrom IDA because Indonesia has been consideredcapable of obtaining semiconcessional loans fromother sources.

Up to the end of 1990, International FinanceCorporation has extended cumulative financialassistance to Indonesia private companies in theamount of $390.2 million comprising $326.6million in loans and $63.6 million in equities.Of the total financial assistance, $158.5 millionoriginated from IFC’s funds and the remainderfrom syndicated loans. The assistance wasextended to 25 private companies dealing withindustry, non-bank financial institutions, andtourism.

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In 1990, the Asian Development Bank(ADB) approved loan to Indonesia in the amountof $599.8 million, $556.9 million of whichoriginated from Ordinary Resources and $42.9million from special Fund of Asian DevelopmentFund. Up to the end of 1990, cumulative ADBloan extended to Indonesia amounted to $6,207.4million, $5,.592.7 million from OrdinaryResources and $614.7 million from SpecialFund. Out of the total approved loans, $3,634.9million or 58.6% had been disbursed. At theend of 1990/91, outstanding ADB loans toIndonesia amounted to $3,214.1 million.

Financial assistance from the IslamicDevelopment Bank (IDB) to Indonesia amountedto ID39.5 million or equivalent to $47.7 millionup to the end of 1990/91. The assistancecomprised equity participation to variouscompanies in the amount of ID 16.8 million,loans in the amount of ID15.0 million, andinstallment sales in the amount of ID7.7 million.Of the total approved assistance, ID19.0 million(48.1%) had been disbursed comprising ID11.5million for equity participation and ID7.5million for loans.

At the end of 1991, outstanding financialassistance from the International MonetaryFund (IMF) to Indonesia amounted to SDR289.3million, which was drawn in 1987 under theCompensatory Financing Facility (CFF). Duringthe financial year, Indonesia earned remunerationand interest income on the reserve position inthe fund and SDR balances in the total amountof SDR0.8 million. It can be added that at theend of reporting year, the overall SDR allocatedto Indonesia amounted to SDR239.0 million.

C.C.C.C.C. International Reserves and ExchangeInternational Reserves and ExchangeInternational Reserves and ExchangeInternational Reserves and ExchangeInternational Reserves and Exchange

RateRateRateRateRate

As mentioned earlier in this chapter thecurrent account deficit in 1990/91 was $3,741million and capital account surplus was $6,780million. Overall foreign exchange reserves heldby Bank Indonesia increased substantially by$3,302 million reaching a level of $9,561 millioncompared with a slight increase of only $248million in the previous year. Taking into accountthe foreign exchange reserves held by foreignexchange banks of $2,584 million at the end of1990/91, national foreign exchange reservesreached $12,145 million or equivalent of 6.7months of non-oil/gas imports.

Taking into account the average inflationdifferential between Indonesia and its majortrading partners, it showed that the real effectiveexchange rate of the rupiah could be maintainedduring 1990/91. As a result, this developmentcontributed in maintaining the competitivenessof non-oil/gas exportable commodities. Thedevelopment of the nominal rupiah exchange rateduring 1990/91, measured by comparing rupiahexchange rate at the end of March 1991 withMarch 1990 showed that rupiah depreciatedagainst the dollar (5.40%), Deutsche Mark(14.93%), British Pound Sterling (18.16%),Japanese yen (14.15%), Netherlands guilder(14.87%), Singapore dollar (12.42%), andAustralian dollar (6.84%). While, inflation ratesin major trading partners were 5.45% in theUnited States, 2.85% in Germany, 9.9% in theUnited Kingdom, 3,25% in Japan, 2.42% in theNetherlands, 3.7% in Singapore, and 6.22% inAustralia.

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As mentioned in Chapter III, IndonesianGross Domestic Product (GDP) in 1990 grew by7.4%. In terms of GDP composition, largecontributions were originated from theagricultural sector (19.6%) and themanufacturing sector (19.3%), while the miningand quarrying sector contributed as much as15.2%. Although some sectors experienced somedeceleration in their growth, the overallperformance was favorable. The favorablebusiness climate stimulated a rapid growth inthe manufacturing sector; however, theconversion of land from agricultural to non-agricultural purposes over the past few years hascaused the growth of the agricultural sector todecline. In the meantime, the growth of themining and quarrying sector also recorded adeceleration due to decreases in the productionof several major mining products experiencinglower prices in the international markets.

A. AgricultureA. AgricultureA. AgricultureA. AgricultureA. Agriculture

In 1990, the growth of the agricultural sectorwas slower than in the preceding year; however,it was still the largest contributor to GDPformation, namely 19.6%. The slower growthwas primarily due to a deceleration in the growthof rice production and a decrease in cassavaproduction. Moreover, international trade andlower prices of several non-oil/gas primarycommodities also affected the production ofseveral agricultural commodities. In themeantime, prospects for horticulturalcommodities -- namely fruits, vegetables, cutflowers, and decorative plants -- appeared to befavorable due to strong demand, domestically aswell as abroad. Unfortunately, most of

horticultural commodities have not beenintensively cultivated as is the case with otherfoodcrops so that the quantity and quality of theproducts are still modest, although Indonesia hascomparative advantages, for example climate,type of soils, and elevation, enabling year-roundcropping. Therefore, efforts to promote theproduction continued to be undertaken.

In the reporting year, policies to stimulateagricultural production were undertaken by theGovernment among other things by raising thefloor prices of dry paddy (gabah kering giling)and cloves and by stimulating soybeanproduction through a new scheme called “specialeffort” (upaya khusus). Furthermore, theGovernment improved clove trade procedure,simplified the licensing procedure of livestockbusinesses, and allowed the utilization of foreignfishing boats in fishery. To foster the conservationof natural forests and to assure sufficient supplyof wooden raw materials, the Government raisedthe Reforestation Fund collected from theholders of Forest Exploitation Rights.

Agricultural policies, regardingfoodcrops, continued to be directed towardsmaintaining self-sufficiency in rice,increasing the production of other foodcrops,and enhancing farmers’ as well as publicwelfare by promoting foodcrops production,in terms of quantity as well as quality. In thisrespect, integrated efforts’ were undertakenthrough diversification, extensification, andintensification schemes. It may be added thatin the reporting year mixed farming usingfoodcrops to replace cover crops onsmallholders’ plantation estates was initiated.

IX. PRODUCTIONIX. PRODUCTIONIX. PRODUCTIONIX. PRODUCTIONIX. PRODUCTION

107

108

In 1990, the harvested areas of paddydecreased by 0.5% to 10,479 thousand hectaresas a result of land conversion from paddy fieldsto non-agricultural purposes. However, riceproduction kept increasing, by 1.2% reaching29,426 thousand tons which surpassed thedomestic demand for rice in 1990, estimated at28,237 thousand tons. The increase in riceproduction was the result of a higher productivity,of 1.6%, in relation to the success in theintensification program and improvement inpost-harvest treatment. Meanwhile, in order toincrease rice production as well as farmers’income the Government raised the floor price ofdry paddy (gabah kering giling) from Rp270.00to Rp295.00 per kg as from January 1, 1991.

Secondary crops experiencing significantincreases in production in 1990 were corn (9.3%)and soybeans soybeans soybeans soybeans soybeans (8.5%). The increases wereattributable to larger harvested areas and higherproductivity, supported by a favorable climate. Itis worth noting that in order to promote soybeanproduction to meet domestic consumption and toreduce imports, starting in the reporting year theGovernment undertook a special program toincrease the production of soybean (Upaya KhususKedelai). The program was intended to beimplemented on 180.7 thousand hectares of landin 19 provinces and consisted of improvedintensification and extensification. Furthermore,to stimulate higher production and increasefarmers’ income the Government raised the floorprice of soybeans by 20% to Rp500.00 per kg.1)

Meanwhile, the production of cassava cassava cassava cassava cassava decreasedby 8.9% due to lower productivity and smallerharvested areas which was affected among otherthings by a decrease in the cassava price in thepreceding year.

In 1990, the areas of plantation plantation plantation plantation plantation estatereached 11,388 thousand hectares, which is anincrease of 2.3% compared with that in thepreceding year. Private-and state-owned estatesaccounted for most of the increase. It may benoted that 85.1% of the total plantation areascan be characterized as smallholders’ estates.Cash crops recording significant increases inproduction in 1990 were oil palm and cloves.

In 1990, rubber rubber rubber rubber rubber production rose by 4.5%reaching 1,263 thousand tons, although theproductive areas of rubber estates declined by4.2% to 1,760 thousand hectares. Thus, the risein production was attributable to an increase inproductivity, of 9.1% reaching 718 kg perhectare. Of the total production, 71.4% wasproduced by smallholders’ estates and theremainder by state and private estates.Meanwhile, rubber rejuvenation program showeda favorable development, reflected in a 2.1%decrease of areas that were no longer inproduction, to 368 thousand hectares and a33.7% increase of areas that were not yet inproduction, reaching 1,113 thousand hectares.The rejuvenation program was supported by asharp growth of investment credits for rubberestates. Moreover, attempts to enhance the qualityof rubber, especially the slabs produced bysmallholders’ estates, were continued.

Efforts to increase sugarcane sugarcane sugarcane sugarcane sugarcane productionwere also continued in the reporting year,especially those cultivated in non-irrigated land.Sugarcane production in 1990 increased by 0.4%to 2,116 thousand tons and sugarcane areas roseby 2.9% reaching 363 thousand hectares. Outof the total areas, 66.2% were under thesmallholders’ sugarcane intensification program(Tebu Rakyat Intensifikasi or TRI) which wasmostly carried out in East and Central Jawa. In1) Presidential Instruction No. 6/1990, October 20,

1991.

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addition to the non-irrigated land cultivationprogram, efforts to increase cane sugar productionas well as the income of sugarcane farmers werecarried out by linking the production sharingmethod and the sugarcane quality premium withsugar content of the sugarcane processed in sugarmills.2) The extension of the sugarcane qualitypremium started on April 1, 1990. The capacityof sugar mills in 1990 amounted to 159,202 tonsof sugarcane per day, which is an increase of2.0% compared with that in the preceding year.Meanwhile, to adjust the price of sugar to people’spurchasing power and to maintain adequateincome level of farmers as well as sugar mills,the Government raised the new floor price ofcane sugar by 8.3% to Rp65,000.00 per quintal.3)

effective April 1, 1991.

Due to the sharply increased areas ofproductive oilpalm oilpalm oilpalm oilpalm oilpalm estates (24.1% reaching717 thousand hectares), palm oil productionincreased significantly by 22.8% reaching 2,413thousand tons. Of the total production, 67.3%was produced by state estates, 32.7% by privateestates, and the remainder by smallholders’estates. Oil palm estates which were not yet inproduction covered 427 thousand hectares, andmost of these were smallholders’ estates. Of thetotal 1,146 thousand hectares of oilpalmplantation, most of which are located in NorthSumatera and Riau, 36.2% was cultivated bystate estates, 35.8% by smallholders’ estates, andthe remainder by private estates. To ecouragepalm oil production and to support the price ofits products, the Government announced a newselling price for crude palm oil for domesticindustries of Rp475.00 per kg FOB Belawan,

effective July 1, 1990.4) It may be added thatmost of the produced palm oil has been useddomestically for the production of cooking oil,soap, and margarine. Exports of palm oil in 1990increased compared to the preceding year.

In 1990, the production of copra copra copra copra copra rose by1.7% to 2,245 thousand tons. The increase wassupported by an increase in productive areas of1.9% to 2,236 thousand hectares and anincreased role of cooperatives in procurementand marketing. Of the total copra production,99.2% was accounted for by smallholders’ estateswhich increased by 1.4% to 3,246 thousandhectares in 1990. The main producing areas ofcoconut can be found in North Sulawesi, Maluku,and Riau. Meanwhile, plantation areas not yetin production covered 865 thousand hectares andthose no longer in production were 232 thousandhectares. In line with the higher production ofcopra, exports of copra cakes in 1990 showedan increase.

Production of coffeecoffeecoffeecoffeecoffee in 1990 rose by 5.7%reaching 424 thousand tons, of which 93.9%originated from smallholders’ estates. The risewas mainly due to a 5.9% increase inproductivity, to 573 kg per hectare. Coffee areasenlarged by 1.3% to 1,056 thousand hectares,which comprised mainly smallholders’ estateswhich in turn expanded by 1.4% to 1 millionhectares. The main coffee variety produced andexported by Indonesia was robusta. In order tobenefit from the international coffee market, theGovernment promoted the cultivation of arabicacoffee and replaced robusta coffee with arabicacoffee in suitable areas. It may be added that inline with the increase in production, exports ofcoffee in 1990 recorded an increase.

2) Minister by Agriculture/Chairman of Badan Pengendali BimasDecrees No. 05/SK/Mentan/Bimas/IV/1990and No. 06/SK/Mentan/Bimas/IV/1990, April 17, 1990.

3) Minister of Finance Decree No. 391/KMK.013/1990,March 29, 1990.

4) Minister of Trade Decree No. 164/Kp/VI/90, June 30,1990.

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Clove Clove Clove Clove Clove production in 1990 increased by 14.5%reaching 63 thousand tons. The significant increasewas attributable to the increase in clove productiveareas, of 6.4% reaching 407 thousand hectaresand a rise in productivity, of 7.6% reaching 154.9kg per hectare. Clove areas not yet in productionrose by 1.8% to 273 thousand hectares. Of thetotal areas of 723 thousand hectares, 97.2% weresmallholders’ estates. In 1990, the latter produced96.8% of the total clove production. To assure thesufficient supply of clove for clove cigaretteindustry and to increase farmers’ income as wellas the role of KUDs in marketing cloves, theGovernment improved the stipulation on clove tradeprocedures and appointed Badan Penyangga danPemasaran Cengkeh (BPPC) to coordinatemarketing.5) In a related move, Badan CengkehNational (BCN) was established to supervise andcontrol the trade of cloves6) and new minimumand maximum prices of Rp7,000.00 andRp8,500.00 per kg were set respectively.7)

Moreover, in line with the requirement for farmersin main producing areas to sell cloves only toKUDs, the number of KUDs marketing cloves rosesignificantly by 50.7% reaching 541 units.

Log production in the reporting year reached25,312 thousand cubic meters or 19.4% lowerthan the annual maximum production stated inRepelita V. This development reflects the successin restricting the production of logs from naturalforests as an effort to preserve the forests.Meanwhile, the number of Forest ExploitationRights decreased from 574 to 515, comprising 499national enterprises and 16 joint-ventureenterprises, with an increase in areas of 1.9%reaching 59,988 thousand hectares. Other

important forest products were rattan, cinnamon,jelutung and copal; with the production and exportof these products still having room to increase.

To foster the conservation of forests and toassure sufficient supply of raw materials forindustries processing forest products, theGovernment raised the amount of the compulsorycontribution to the Reforestation Fund (DanaReboisasi) to $10.00 per cubic meter of logsextracted.8) Furthermore, the Governmentimproved the administration, collection, anddistribution system of Forest Exploitation Fee(iuran hasil hutan).9)

In the reporting year, 90.3 thousand hectaresof Industrial Forest Estates (hutan tanaman industrior HTI) were established which correspond withan increase of 87.2% as compared with that inthe previous year. The remarkable increase wasdue among other things to the enhanced role ofthe private sector and the increased significanceof the Reforestation Fund. The development ofHTI, mainly with pine, sengon, and rubber treesas the major crops, was conducted in and outsideHPH areas by giving priority to futile areas (tanahkosong), wild grass fields (padang alang-alang),and unproductive forests. It may be added thatmost of HTI areas developed in the reporting yearwere located in South Sumatera, Riau, and NorthSumatera. However, at the end of the reportingyear the largest HTI areas were located in EastKalimantan (26.5%).

Production and population of livestocks livestocks livestocks livestocks livestocks in1990 continued to record increases. Productionof meats, eggs, meats, eggs, meats, eggs, meats, eggs, meats, eggs, and milk milk milk milk milk increased by 11.4%,3.5%, and 6.5%, respectively, due to among

5) Minister of Trade Decree No. 306/KP/XII/1990, December28, 1990.

6) Minister of Trade Decree No. 307/KP/Xll/1990, December28, 1990.

7) Minister of Trade Decree No. 23/KP/I/1991, January 30,1991.

8) - Presidential Decree No. 29/1990, July 1, 1990,- Minister of Forestry Decree No. 404/Kpts/IV/1990, August

7, 1990.9) Presidential Decree No. 30/1990, July 1, 1990.

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other things improvements in counseling, feedprocurement, credit facilities, and favorablesurroundings. Most of the total meat productionof 1,082 thousand tons consisted of poultry meatand beef. Meanwhile, the production of eggsreached 472 thousand tons, mainly produced bylayers. Production of milk reached 360 millionliters, an increase of 6.5% from that in theprevious year. The increase was in line with theincreased number of imported productive milchcows and the improved domestic market for milk.Furthermore, the increase in milk productionwas also due to the success of milk cooperativesin supporting the production and marketingactivities of their members. In 1990, the numberof cooperatives/village cooperative units (KUDs)dealing with milk production and marketingrose by 3.2% to 196 units. In addition, toincrease farmers’ income and employmentopportunities, the Government improved thesmallholders’ nucleus estates scheme for milk(PIR Persusuan) to the new scheme (PIRPersusuan Pola Baru).10)

Livestocks experiencing significant populationincreases in 1990 were broilers (31.7%) and milchcows (6.3%). The rise in the population of broilerswas in line with the removal of the limit on farmsize which enabled farmers to reach the economiesscale of production. The increase in the numberof milch cows was attributable among other thingsto the importation of milch cows and the successin artificial insemination. Meanwhile, the role ofcooperatives dealing with livestock farming toincrease livestock population was enhanced bydistributing baby stocks. It may be noted that inOctober 1990 Indonesia was declared free fromFoot and Mouth Disease (Apthae epizootica).(Apthae epizootica).(Apthae epizootica).(Apthae epizootica).(Apthae epizootica).

In order to promote smallholders’ farmbusinesses and to preserve a healthy environment,in December 1990 the Government introduced agrouped farming scheme in certain areas. The newscheme was expected to generate higher farmers’income and more export earnings from livestock.Moreover, the Government simplified the licensingprocedures and broadened the use of the licensein order to promote livestock production.11)

In 1990, fishery fishery fishery fishery fishery production grew by 4.3%reaching 3,169 thousand tons, most of whichoriginated from sea-fishery. Sea-fishery productionrose by 4.5% reaching 2,374 thousand tons dueamong other things to an increase in privateinvestments and promotion of smallholders’ fishery.Moreover, the rise in sea-fishery production wasalso supported by the establishment of new fishingports and the improvement in fishing techniques.To promote fishing in Indonesian exclusiveeconomic zone, national fishing enterprises wereallowed to rent foreign fishing boats.12) Meanwhile,supervision of fishermen groups and promotion ofthe role of KUDs in fishery activity weremaintained.

The production of inland-fishery rose by 3.9%reaching 795 thousand tons, attributable toincreases in fish cultivation in rice fields (27.5%),fresh water ponds (8.8%), and in brackish waterponds (5.4%). The increases were achieved amongother things through the implementation of farmingdiversification and intensification methods as wellas the promotion of private investments.

B. ManufacturingB. ManufacturingB. ManufacturingB. ManufacturingB. Manufacturing

As in previous years, the manufacturing

10) Minister of Agriculture Decree No. 571/Kpts/TN.320/8/90, August 15, 1990.

11) Minister of Agriculture Decree No. 362/Kpts/TN.120/5/1990, May 28, 1990.

12) Minister of Agriculture Decree No. 816/Kpts/Ik. 120/11/90, November 1, 1990.

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sector continued to be the second largestcontributor to GDP next to the agricultural sector.The growth rate of the manufacturing sector in1990 reached 12.3% compared with 9.1% in thepreceding year. A sharp growth took place in thenon-oil/gas manufacturing industry. To acceleratethe growth of local manufacturing activity, theGovernment gradually entitled chairmen of theMinistry of Industry provincial offices to extendlicenses for manufacturing businesses.13) It maybe, added that in line with efforts to enhancethe role of cooperatives in promoting smallscaleindustries, the number of cooperativesparticipating in the procurement and marketingof traditional handicrafts increased to 495 units.

To encourage investment in export-orientedmanufacturing industries, the Governmentimproved the regulation on industrial estatedevelopment. Industrial estates, either state-orprivately-owned, may now be administered asbonded zones.14) To fulfil the need forinfrastructures supporting the production inthese estates, the Government established alimited liability company to manage the bondedindustrial zone.15)

Furthermore, to meet the demand forelectricity in industrial estates, the Governmentremoved import duties on diesel generators withoutputs of more than 375 KVA.16) Moreover, toimprove the quality of industrial products, theGovernment continued the efforts to draw upand to implement Indonesian industrial standard(Standar Industri Indonesia or SII), amongothers, by requiring producers of packaged

drinking water to meet the SII to protectconsumers and to foster a fair competition amongproducers.l7) In the reporting year, 230 SIIs werecompleted compared with 145 in 1989/90.

The production of fuel oils fuel oils fuel oils fuel oils fuel oils in 1990 roseby 10.7% reaching 189.8 million barrels. Therise was closely related to the attempts to fulfildomestic fuel oils’ consumption which increasedby 13.1% reaching 202.4 million barrels.

Policies regarding oil refinery continued tobe aimed at fulfilling the growing demand forfuel oils and increasing the value added of oilrefinery as well as foreign exchange earnings.In this connection, a fuel oils refinery inBalongan (West Jawa) with an installed capacityof 125 thousand barrels per day was underconstruction in the reporting year and wasexpected to commence production in 1994.

Furthermore, to reduce fuel oils’ subsidiesfor domestic consumption, in May 1990 theGovernment raised the prices of fuel oils.18) Theselling prices of avgas and avtur were raised by32% to Rp330.00, gasoline by 16.9% toRp450.00, kerosene by 15.1% to Rpl90.00, gasoil (minyak solar) by 22.5% to Rp245.00, die-sel oil by 17.5% to Rp235.00, and fuel oil by10.0% to Rp220.00.

In 1990/91, the production of liquefiedliquefiedliquefiedliquefiedliquefiednatural gas (LNG) natural gas (LNG) natural gas (LNG) natural gas (LNG) natural gas (LNG) rose by 15.7% reaching1,142.0 million MMBTUs produced by the Arunplant in Aceh and the Badak plant in Bontang.All of the LNG production was destined for Japan,South Korea, and Taiwan. In line with the growingoverseas demand, in March 1991 train F in Badak

13) Minister of Industry Decree No. 16/M/SK- 1/4/1990,April 2, 1990.

14) Government Regulation No. 14/1990, May 25, 1990.15) Government Regulation No. 34/1990, July 24, 1990.16) Minister of Finance Decree No. 82/KMK.00/1991,

January 24, 1991.

17) Minister of Industry Decree No. 120/M/SK/10/1990,October 24, 1990.

18) Presidential Decree No. 20/1990, May 24, 1990.

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plant in Bontang with an installed capacity of 2.3million tons (119.0 million MMBTUs) per yearwas under construction. The construction isexpected to be in production in 1993. By then,the total installed capacity of LNG processing unitswill rise to 1,223.6 million MMBTUs per year.

The production of liquefied petroleumliquefied petroleumliquefied petroleumliquefied petroleumliquefied petroleumgas (LPG) gas (LPG) gas (LPG) gas (LPG) gas (LPG) in the reporting year increased by7.5% reaching 2,770.4 thousand tons, mostlydestined to export. Of the total production,59.0% was produced by the Arun plant and theremainder by other plants, including the newLPG plant in Arun, Sorong, Irian Jaya whichjust started the production in the reporting year.The new plant with an installed capacity of13,870 tons per year was the first LPG plant inthe eastern part of Indonesia.

In the reporting year, the production ofplywood plywood plywood plywood plywood and sawn timber sawn timber sawn timber sawn timber sawn timber rose by 8.8% and2.3%, respectively, reaching 8,370.0 thousandcubic meters and 11,100.0 thousand cubicmeters. The increase in the outputs of plywoodwas closely related to the increasing domesticdemand and to exports. It may be noted thatplywood remained the most important non-oil/gas export commodity of Indonesia that dominated85% of world plywood market. In the meantime,the rise in the outputs of sawn timber was closelyrelated to the increase in domestic demand.

Policies regarding wood industries in thereporting year continued to be directed towardspromoting exports of wooden finished goods. Tothis end, in order to optimalize the utilization offorests, while taking into consideration theconservation of the forests, the Governmentallowed the exports of sandalwood, ”laka” wood,and aloeswood in certain forms by certainexporters. Moreover, to assure sufficient supply

of raw materials for the domestic wood industry,the Government exempted imported logs fromimport duties.l9)

In the reporting year, the production offertilizer fertilizer fertilizer fertilizer fertilizer increased by 3.4% reaching 7,012.1thousand tons. Urea fertilizer rose by 4.9% to5,131.1 thousand tons while ZA and TSPfertilizer decreased by 0.4% to 1,881.0 thousandtons. To meet the domestic demand for fertilizer,Pusri 1-B plant with an installed capacity of570 thousand tons of urea per year wasconstructed and is expected to be in productionin 1993, bringing about the total installedcapacity of urea manufacturing plants to 5,510thousand tons per year.

The production of cement cement cement cement cement in the reportingyear rose by 11.9% reaching 15,783.0 thousandtons, due mainly to the high domestic demandfor cement. Meanwhile, problems in thedistribution of cement in some regions causedan insufficient supply in the market and asignificant increase in domestic demand causeda remarkable increase in prices. Owing to thissituation, in October 1990 the Governmentsuspended the exports of cement and exemptedimported cement from import duties.20)

At the end of the reporting year, there were10 cement manufacturing plants with a totalinstalled capacity of 17,400 thousand tons peryear. Of the total installed capacity, approximately31% were managed by state enterprises and theremainder by private enterprises.

19) -Minister of Trade Decree No. 146/Kp/V/1990, May28, 1990.- Minister of Finance Decree No. 1225/KMK.00/1990,October 20, 1990.- Director General of Foreign Trade Circular LetterNo. KUM 703/DAGLU/0547/90, September 6, 1990.

20) Minister of Finance Decree No. 1131/KMK.00/1990,October 10, 1990.

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Owing to the expectation of a growing demandfor cement, in the reporting year installed capacityof several cement manufacturing plants, namelySemen Padang, Semen Gresik, Semen Tonasa; andSemen Cibinong were expanded. The expansionswere expected to be completed in the beginningof 1993.

Although paper paper paper paper paper production in the reportingyear kept increasing significantly, namely by21.8% reaching 1,399.7 thousand tons, yet itcould not fulfil the growing domestic demand forpaper. Therefore, particularly for imports ofnewsprint, the Government exempted importersfrom import duties.21) Paper utilization per capitain Indonesia remained lower than those in othersoutheast Asia countries. Policies regardingpromotion of paper industries aimed at utilizingthe comparative advantages of Indonesia’s paperindustries, such as the availability of raw materialssupported, among others, by the establishment ofindustrial forest estates.

In the reporting year, the production oftextile textile textile textile textile and weaving yarn weaving yarn weaving yarn weaving yarn weaving yarn increased by 11.9%and 4.9% reaching 5,028.2 million meters and3,572.7 thousand bales, respectively. Theseincreases were accounted for, among others, thefavorable circumstances of exporting textile I andweaving yam to non-quota countries and theproduction of several new textile manufacturingplants.

Policies regarding the promotion of textileindustry in the reporting year continued to beaimed at promoting the partnership betweensmallscale industries and medium-scaleindustries to encourage specialization based on

efficiency and product diversification.Furthermore, there were efforts to enhance thecompetitiveness of textile exports, to improve thequota system, and to expand countries forexports’ destination. To promote the exports oftextile and textile products (TPT), theGovernment improved the export procedures forTPT by reformulating the export quotadistribution system.22)

Basic metal Basic metal Basic metal Basic metal Basic metal production in the reporting yearrecorded a favorable developments, attributedmainly to the increase in the domestic use of basicmetal, particularly in the construction sector. Basicmetals experiencing substantial increases inproduction were aluminum plate (66.2%), concretesteel bar (49.9%), steel ingot (25.6%), and steelpipe (19.8%). Meanwhile, to further develop basicmetal industries, the Government in the reportingyear allowed the private sector to directly importthe raw materials, namely hot rolled coils and coldrolled coils.23)

The transportation vehicle transportation vehicle transportation vehicle transportation vehicle transportation vehicle industry in thereporting year grew remarkably as reflected in theincreases in the production of four-wheeled andtwo-wheeled motor vehicles by 55.3% and 45.9%,respectively, reaching 271.4 thousand units and410.0 thousand units.

These remarkable increases were closelyrelated to the high domestic demand. It may beadded that in the reporting year the Governmentallowed the importation of small andmedium-size commercial trucks in order to fulfilthe growing domestic demand.24)

22) Minister of Trade Decree No. 224/Kp/IX/90,September 21, 1990.

23) Minister of Trade Decree No. 147/Kp/V/90, May 28,1990.

24) Minister of Trade Decree No. 131/Kp/V/90, May 14,1990.

21) Minister of Finance Decree No. 1503/KMK.05/1990,November 20, 1990.

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Similar to the production of motor vehicles,the production of steel vessels in the reportingyear rose by 44.9% reaching 32.6 thousandBRT. The rise was related to increases in overseasas well as domestic demand.

In the reporting year, other manufacturingother manufacturingother manufacturingother manufacturingother manufacturingproducts products products products products experiencing sharp increases inproduction were car radio cassette recorders, of69.5% reaching 3,797.8 thousand units, televisionsets, of 35.8% reaching 1,082.0 thousand units,and radio and radio cassette recorders, of 32.2%reaching 3,091.7 thousand units. Other productsrecording significant increases were light bulbs/TL bulbs and batteries.

C. Mining and QuarryingC. Mining and QuarryingC. Mining and QuarryingC. Mining and QuarryingC. Mining and Quarrying

In 1990, the mining and quarrying sector grewby 4.3% compared with 5.8% in the precedingyear, affected by the decelerating growth of coal,ferro-nickel, and bauxite production and decreasesin tin, nickel matte, and silver production. Thedecelerated growth of the mining and quarryingsector caused its share in GDP to be smaller, namely15.1%, compared with 15.6% in 1989.

In 1990/91, oiloiloiloiloil production recorded anincrease of 20.2% reaching 619.5 millionbarrels, comprising 553.0 million barrels ofcrude oil and 66.5 million barrels of condensate.Out of the total oil production, 576.4 millionbarrels were produced by Production Sharingcontractors, 28.6 million barrels by Pertamina,and 14.5 million barrels by Contract of Workcontractors. The increase in oil production wasrelated not only to the improved prices in theworld market resulting from the Gulf Crisis, butalso to the starts in production of several newoil fields and the increase in the production ofenhanced oil recovery projects.

As regards oil exploration, in the reportingyear 17 new oil agreements were signedconsisting of 15 Production Sharing Agreementsand 2 Joint-venture Agreements. With theadditional contracts, at the end of the reportingyear the total number of Production SharingAgreements and Joint-venture Agreements were117 and 19, respectively. Meanwhile, explorationactivities succeeded in discovering 123 wells,of which 8 were drilled by Pertamina, 1 by aContract of Work contractor, and 114 byProduction Sharing contractors. Of 114 wellsdrilled by Production Sharing contractors, 69were drilled off-shore.

In the past few years, natural gas natural gas natural gas natural gas natural gas productioncontinued to record increases. In 1990/91, naturalgas production rose by 9.7% reaching 2,206.9million MSCF, of which 1,910.2 million MSCFwere produced by Production Sharing contractors,267.0 million MSCF by Pertamina, and theremainder by Contract of Work contractors. Theincrease in natural gas production was closelyrelated to the increase in demand for LNG to fulfilthe long-term (20 years) contract of sales, mainlywith Japan.

Coal Coal Coal Coal Coal production in 1990/91 rose by 18.3%reaching 11,211.6 thousand tons compared with83.1% in the preceding year. The decelerationwas mostly caused by a slowdown in privatemines’ production. Out of the total production,5,119.7 thousand tons were produced by statemines in Bukit Asam and Ombilin and theremainder by private national and foreign mines,mainly in East Kalimantan.

In line with policies aimed at the efficientuse of fuel oils and diversification of sources ofenergy, domestic consumption for coal rose by6.5% to 5,542.6 thousand tons in 1990/91. The

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rise was mainly attributable to the increasinguse of coal in cement industry and steam-poweredelectricity generating plants as well as insmallscale industries, such as brick and roof tileindustries. It may be added that export of coalmainly destined for ASEAN countries recordeda significant increase.

Other important mining products Other important mining products Other important mining products Other important mining products Other important mining products werecopper, tin, nickel, bauxite, gold, and silver. Inthe reporting year, the production of concentratedcopper copper copper copper copper rose substantially by 51.3% reaching499.3 thousand tons. The rise was due not onlyto the increase in copper ore production, from26 thousand tons to 32 thousand tons per day,but also to the increase in overseas demand. Theproduced concentrated copper was exportedbecause there was no such a plant to processconcentrated copper to copper metal inIndonesia.

TTTTTininininin production in 1990/91 experienced adecline of 5.4% to 29.8 thousand tons comparedwith a rise of 3.3% in the preceding year. Thedecline was mainly attributable to thedeteriorated tin prices in the internationalmarket. It is worth mentioning that theunfavorable price development was due not onlyto the falling demand for tin as its substitutions,such as plastic and aluminum foil, wereprogressively developed, but also to the largeexport of tin by Brazil and the high world stocksof this commodity (42.5 thousand tons). In themeantime, domestic use of tin remained relativelysmall, averaging 1.2 thousand tons per year or4.2% of production.

In order to improve tin prices in theinternational market and to reduce world stocksto around 20 thousand tons, the Association ofTin Producing Countries continued to assign

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export quota to its members. For the period ofMarch 1, 1990 up to December 31, 1990, thetotal exports of tin were fixed at 84.2 thousandtons; the allotment for Indonesia was 24.9thousand tons or decreased by 5.396 from thatof the same period in the preceding year.

The productions of nickel ore nickel ore nickel ore nickel ore nickel ore andferro-nickel ferro-nickel ferro-nickel ferro-nickel ferro-nickel in the reporting year roserespectively by 39.0% and 2.0% reaching2,296.7 thousand tons and 5.1 thousand tons.Meanwhile, the production of nickel mattedeclined by 9.7% to 27.1 thousand tons mainlydue to manufacturing plant failures.

In the reporting year, bauxite bauxite bauxite bauxite bauxite productionsurged by 33.1% reaching 1,324.5 thousandtons. The surge was attributed not only to thegrowing demand from Japan, the main importerof Indonesian bauxite, but also to the marketingbreak-through to the United States of Americaand Norway. It may be noted that all of bauxiteproduction were destined for exports. However,to increase the value added of bauxite, theGovernment renewed the plan for theconstruction of an alumina plant in Bintan islandwith an installed capacity of 600 thousand tonsper year. The plant is expected to produce 450thousand tons of alumina, which partly will beused for the Asahan aluminum plant in NorthSumatera which has been importing alumina fromAustralia.

Gold Gold Gold Gold Gold production in 1990/91 boosted by96.4% reaching 13,102.1 kg. The marked increasewas attributed to increases in the production ofseveral private gold mines. In the meantime, theproduction of silver silver silver silver silver decreased by 7.0% to68,202.6 kg due, among others, to lower silvercontent in the deposits.

D. OthersD. OthersD. OthersD. OthersD. Others

The growth of other sectors other sectors other sectors other sectors other sectors outside theagricultural, manufacturing, and the mining andquarrying sectors in 1990 registered a favorabledevelopment. Satisfactory performance wasrecorded in the fields of transportation, tourism,telecommunication, and electricity generation.

To foster and to make a success the programof Visit Indonesia Year 1991 -- the programmainly aims to raise the number of foreigntourists visiting Indonesia -- the Governmentmade efforts to provide sufficienttransportation transportation transportation transportation transportation means connecting tourist pointsof interest among other things by promoting therole of airlines and increased infrastructuralcapacities for air transportaion.25) Besides, theGovernment continued the policies regardingother transportation means to expedite the flowof passengers, cargo, as well as information. Inthe meantime, owing to increases in fuel oils’prices, in the reporting year the Governmentadjusted transportation fares.26)

In the reporting year, the number of meansof transport and the production of transportationservices in general underwent a favorabledevelopments. The largest increase in thenumber of means of transport registered ininterisland shipping lines, while the servicesconcentrated in road transportation. However,there were still some constraints in the provisionof sea transportation means and infrastructures,particularly in the eastem part of Indonesia.

25) Minister of Transportation Decree No. KM 94/1990,October 11, 1990.

26) Minister of Transportation Decree No. KM 94/1990,October 11, 1990.

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The development of tourism tourism tourism tourism tourism continued tobe conducted by promoting national tourismpotentialities for the purpose of increasing foreignexchange earnings as well as expanding anddistributing equally the opportunity ofconducting businesses. To these ends, theGovernment put Act No.9/1990 on tourism intoeffect in October 1990.

To increase the number of tourists visitingIndonesia, in January 1991 the Governmentproclaimed the beginning of Visit Indonesia Year1991. In this connection, in the reporting yearthe Government designated the addition of 7tourist-visa-free countries and 4 tourist pointsof interest as well as determined Juanda airportin Surabaya as an international airport and anentry for visa-free tourists. As well, the numberof star-rated hotels rose to 410 with 34,971rooms with an occupation rate of 62.9%, whileunstar-rated hotels increased to 5,062 with81,812 rooms. Meanwhile, the number of travelagencies went up from 917 to 1,078.

In 1990, the number of foreign touristsvisiting Indonesia rose by 33.9% reaching2,177,566 persons, most of which came throughthe main entries, namely Batam island, Jakarta,Bali, and Medan. By nationality, most of thetourists came from Singapore, Japan, andAustralia.

As regards telecommunication, telecommunication, telecommunication, telecommunication, telecommunication, itsdevelopment continued to be aimed at enhancingthe role of the private sector and expanding thetelecommunication networks. To promote therole of the private sector, in line with Act No.3/1989 on telecommunication, the Governmentintroduced guidelines regarding the provisionof telecommunication facilities by institutions

27) Minister of Tourism, Post, and Telecommunication DecreeNo. KM54/UM.001/MPPT-90, May 29, 1990.

28) Minister of Tourism, Post, and Telecommunication DecreeNo. KM 90/PT.102/MPPT-90, September 11, 1990.

29) Minister of Tourism, Post, and Telecommunication DecreeNo. KM 91/PT.102/MPPT-90, September 11, 1990.

30) - Board of Directors of Perusahaan UmumTelekomunikasi Decree No. KD 2518/NGOO/ OPE-00/1990, October 9, 1990.- Board of Directors of Perusahaan UmumTelekomunikasi Decree No. KD 2519/NGOO/ OPE-00/1990, October 9, 1990.

other than Perumtel.27) In this connection,intelnet service was provided throughcooperation of PT Indosat with Intelsat andPerumtel to fulfil the need of quick and reliabledata transmission through satellite.28) Moreover,sixty cities were determined as internationalgates for conducting intelnet services.29) In thereporting year, the Government adjusted thetariffs for certain telecommunication services.30)

To expand telecommunication networks, theGovernment made an effort to gradually increasethe number of public telephones andtelecommunication stalls (wartel) to reachvillages. Efforts to promote, acknowledge, andutilize high technology to produce newtelecommunication services continued to beexecuted by among other things launching PalapaB-2R satellite in April 1990 replacing PalapaB-1 satellite which is expected to terminate atend 1990. It is worth noted that starting withthe reporting year Indonesian automatic telegramcenter (Sentral Telegram Otomatis Indonesia)and Intelsat Business Service were utilized forconducting international integratedtelecommunication services.

In anticipation of a growing demand fortelecommunication means in line with thebooming investment activity, in the reporting yearcooperations with private parties throughProduction Sharing, Impure Grant, and

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Compensation schemes were accomplished. Thecooperations were carried out in constructingmotor-vehicle telephone networks (SambunganTelepon Kendaraan Bermotor) and automaticcentral telephone (Sentral Telepon Otomat orSTO) as well as in providing telecommunicationappliances, such as cable networks, fiber-optic,and radio-link. Several achievements in 1990were the increased number of STOs as well asthe capacity, the increased number of earthstations and wartels, larger capacity of generaltelex, and expansion in the coverage oflong-distance direct dialing networks,international direct dialing networks, andpackage data communication networks.

Policies on electricity electricity electricity electricity electricity continued to beaimed at enhancing public welfare and promotingeconomic activity. In this regard, the constructionof electricity infrastructures continued to beconducted to satisfy the demand for electricity.

Electricity distributed by the State ElectricCompany (PLN) in 1990/91 showed a significantincrease, of 17.9%, reaching 34,868.0 millionKWH. The increase was caused by rises inelectricity production of PLN (18.4%) reaching34,012.0 million KWH and of non-PLN (2.4%)reaching 856.0 million KWH. Meanwhile, theamount of electricity sold in 1990/91 rose by18.3% to 27,734.9 million KWH mainly due tothe rise in electricity used in the manufacturingsector, of 24.0% reaching 14,155.4 millionKWH. Sales to households and others increasedby 13.3% and 12.4% reaching 9,005.4 millionKWH and 4,574.1 million KWH, respectively.

Although the production of electricityrecorded an increase, a shortage of electricityoccurred in the reporting year as sharp increasein demand from the manufacturing sector took

place. Initially, the growth of electricity demandin Repelita V was projected at 15.0% per year ;in fact, in 1989/90 and 1990/91 it reached17.0% and 17.2% per year, respectively. PLN,as a sole distributor of electricity, encounteredconstraints in anticipating the demand, namelythe needed large costs.

To meet the increasing demand forelectricity, the Government continued to expandand speed up the construction of electricitygenerating plants. In addition, the Governmentallowed private investors to participate in theconstruction of electricity generating plants incooperation with PLN and encouraged them tofulfil their own need by facilitating imports ofdiesel engines.

In 1990/91, the construction ofwater-powered electricity generating plants ofBakaru in South Sulawesi with an installedcapacity of 126 MW was completed. In total,the installed capacity of electricity generatingplants in 1990/91 recorded an increase of 8.7%reaching 9,275 MW. In the meantime, theconstruction of steam-powered electricitygenerating plant of Paiton in East Jawa with aninstalled capacity of 800 MW and steam/gas-powered electricity generating plant of Gresikin East Jawa and of Belawan in North Sumaterawith installed capacities of 1,500 MW and 720MW, respectively, were hastened.

In addition, to promote regional economicdevelopment, the Government continued toprovide electricity to villages. At end of 1990,the number of villages benefiting from electricityservices were 22,936, or 32.8% of all villagesthroughout Indonesia. Meanwhile, the numberof KUDs distributing electricity to villages roseby 35.5% reaching 1,539 units.

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