INDONESIA i-page.pdf - Public Disclosure Authorized ReportNo.5066-IND Indonesia Policiesand Prospects for Economic Growth and Transformation Part

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Unformatted text preview: Public Disclosure Authorized ReportNo.5066-IND. Indonesia Policiesand Prospects for Economic Growth and Transformation Part I-Recent Economic Performance and Medium-Term Perspectives Part Il-Selected Issuesof Regional and Urban Development April26, 1984 EastAsia and Pacific Regional Office FOR OFFICIAL USE ONLY U Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized ( Documentof the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS US$1.00 = RI) 415 Before November 15, 1978 Annual Averages 1979-83 US$1.00 = Rp 623 US$1.00 = Rp 627 1979 1980 1981 US$1.00 . = Rp 632 US$1.00 = Rp 661 US$1.00 = Rp 909 /1 1982 1983 US$1.00 = Rp 1,004 April 26, 1984 FISCAL YEAR Government Bank Indonesia State Banks /1 I April 1 to March 31 April 1 to March 31 January 1 to December 31 On March 30, 1983 the Rupiah was devalued from US$1.00 = Rp 703 to US$1.00 = Rp 970. FOR OFFICIAL USE ONLY POLICIES AND PROSPECTS FOR ECONOMIC GROWTH AND TRANSFORMATION TITLE : INDONESIA: COUNTRY : INDONESIA REGION : EAST ASIA AND PACIFIC SECTOR : COUNTRY ECONOMIC REPORT TYPE CLASSIFICATION MM/YY LANGUAGE 5066-IND CEM Official 04/84 English Use 1984 PUBDATE April ABSTRACT Part I of this report undertakes a preliminary assessment of the initial impact of the policy measures that the Government adopted in early 1983 in response to the deteriorating external payments position of the country and the need for diversifying the sources of growth and export earnings; it also examines the main issues facing Indonesia in the years ahead and assesses the country's medium-term prospects. Part II discusses some of the main features of regional and urban development in Indonesia during the 1970s, and reviews, on a selective basis, some of the related issues of urbanization and the provision of urban services. This documenthas a restricteddistributionand maybe used by recipientsonly in the performanceof their officialduties. Its contents may not otherwisebe disclosedwithoutWorldBankauthorization. INDONESIA POLICIES AND PROSPECTS FOR ECONOMIC GROWTH AND TRANSFORMATION Table of Contents Page No. vii to xxiii SUMMARY AND CONCLUSIONS....................... PART I CHAPTER 1 - - RECENT ECONOMIC PERFORMANCE AND MEDIUM-TERM PERSPECTIVES......................... 1 RECENT TRENDS IN ECONOMIC PERFORMANCE AND POLICIES ..................................... 2 A. The Onset of Recession Introduction and Policy . Responses . ... 2 2 . 3 The Setback ................................ The Adjustment Response: 1983 . 3 B. Progress in Macroeconomic Adjustment A Preliminary Assessment ...................... Progress Towards External Equilibrium ...... Restraining Investment Expenditures ........ Changes in the Government's Financial Position ....................... The 1984/85 Budget ......................... The Impact of Changing Subsidy Policies.... Financial Reforms and Resource Mobilization in the Private Sector....... C. Growth, Incomes and Inflation................. GDP Growth and Developments in Selected Sectors.............................. Inflation, Incomes and Employment............. CHAPTER 2 - 5 6 9 11 14 15 18 22 23 25 ADJUSTMENT AND TRANSFORMATION: THE MACROECONOMIC FRAMEWORK ...................................... 29 A. The External Economic Setting................. 29 This report was prepared by a team comprised of Javad Khalilzadeh-Shirazi (team leader), Frederick Kilby, Daniel Morrow, Vikram Nehru, P. Suriyaarachchi, and Hafez Ghanem. Andrew Hamer and Ho-Shik Kim also contributed. A draft of the report was discussed with the Government in April 1984. - ii - Page No. B. CHAPTER 3 Macroeconomic Framework for Restoring Growth with External Payments Stability .......... Economic Management in the Short Run .. Highlights of Macroeconomic Projections - The Base Case............................. Uncertainties in the Prospects . . 35 38 C. Impact on Employment and Income................... 41 D. Management of the Investment Program ............. The Import Intensity of Investment . . Sectoral Priorities in the Investment Program .......................... Coping with Uncertainties in the Investment Program . . Improving Project Implementation Performance.. The Role of the Private Sector and Deregulation ............................ 44 46 - DOMESTIC RESOURCE MOBILIZATION: SELECTED ISSUES AND PROSPECTS .................................... A. Public Finance: The Challenge of Increasing Public Savings................................ Measures to Raise Tax Revenues............. Restraining Current Expenditures ........... Financing Government Investment............ Selected Issues in Financing of Public Enterprises ....................... Cost Recovery.............................. CHAPTER 4 32 33 - 50 53 56 58 62 62 63 69 70 71 73 B. The Changing Role of the Financial Sector ..... Monetary Control and Management . . Resource Mobilization and Financial Intermediation ................. Cost and Allocation of Credit . . 75 75 EXTERNAL TRADE AND CAPITAL REQUIREMENTS ....... 85 ... A. Export Policies and Prospects .................. The Oil and LNG Sector ...................... Policies Influencing Non-Oil Export Performance ........................ Prospects for Non-Oil Export Receipts ...... B. Import Policies and Requirements.............. The Continuing Problem of Protectionism.... The Future Capacity to Import .............. 77 80 85 86 87 92 98 98 102 -iii - Page No. C. External Financing Requirements and Borrowing Strategy............................ External Financing Requirements, 1984/85-1986/87 .......................... External Borrowing Strategy................ Projections of Debt and Debt Service.......... PART II - SELECTED ISSUES OF REGIONAL AND URBAN DEVELOPMENT OVERVIEW CHAPTER 5 - - - 116 118 .................................. Introduction in Economic Structure..... Regional Variations Population Growth and Labor Mobility .......... Spatial Dimensions of Income and Poverty...... Spatial Variations in Government Spending and Services................................ 118 119 123 127 URBANIZATION AND SPATIAL DEVELOPMENT POLICY...... 137 Introduction.................................. Trends in Urban Development and Concentration Urbanization and Employment................... Spatial Development Policy Issues............. 137 138 145 148 A. B. C. D. CHAPTER 7 104 107 111 ......................................... 116 KEY FEATURES OF SPATIAL DEVELOPMENT IN INDONESIA 1970-80 .............................. A. B. C. D. E. CHAPTER 6 .. 104 132 URBANIZATION - FINANCIAL AND ADMINISTRATIVE ISSUES 158 Introduction.................................. Expenditures on Urban Services................ Financing Urban Services...................... Central and Local Administration.............. 158 159 162 167 APPENDIX TABLES TO PART II ........................................... 174 ST 17 A. B. C. D. N A D T B E ................................................. . . STANDAIRDTABLES.178 ANNEXES I. II. MAP Analysis and Projection Tables ............................... Historical Economic Data..................................... 182 191 - iv - Text Tables Table No. 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 1.11 1.12 1.13 1.14 1.15 1.16 1.17 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 3.1 3.2 3.3 3.4 3.5 3.6 3.7 4.1 4.2 4.3 4.4 4.5 Page No. GDP Growth: A Comparative Perspective .. 2 Key Variables Affecting the Current Account Balance, 1978/79 - 1983/84..................................... 4 Summary of Balance Payments, 1981/82 1983/84........ ...... 6 Non-Oil Export Performance, 1982/83 1983/84........ ..... 8 Non-Oil Imports, 1982/83 - 1983/84............................. 9 Public Sector Investment 1974/75 - 1983/84......... ..... ....... 10 The 1983/84 Budget Outturn..................................... 13 The 1984/85 Budget.............................................. 14 Development Expenditures by Sector....................... ...... 15 Domestic Oil Prices, 1981 - 1984....................... . 16 The Burden of Oil Price Increases - Sectoral Shares . .17 Public Expenditures per Capita in Social Sectors, 1980/81 - 1984/85.................................. 17 Interest Rates of Commercial Banks, 1979 - 1983....... ....... 20 Bank Deposits and Money Supply, 1980 - 1983......... ..... . 21 Time Deposits with State Banks, 1979 - 1983......... .......... 21 Growth in Sectoral Value Added, 1981 - 1983......... ....... 23 Rates of Inflation .. 26 - - Selected Indicators of International Economic Activity 1983-90............................................ Growth and Composition of GDP, 1976-90.................. Growth in GDP by Expenditure Category, 1976-80.............. Selected Economic Indicators under the Alternate Scenario...... Projections of GDP, GDI and Imports of Capital Goods, 1983/84 - 1990/91................ , . .......... Impact of Large Industrial Projects on Import Intensity of Investment, 1981/82 - 1983/84.......................... Import Content of Sectoral Programs and Sectoral Composition of Public Sector Development Expenditures.................... GDI, Imports of Capital Goods and Import-Intensity of Investment; 1983/84 - 1990/91 ................................ Consolidated Statement of Government Finance 1978/79 - 1990/91 Tax Revenue by Type of Tax .. Non-Oil Taxes - Buoyancy Assumptions .. Oil and Energy Revenues in the Medium Term . .67 The Changing Structure of Government Revenues, 1972/73 - 1990/91............................................ Summary of Public Sector Investment and Finance................ Indicative Cost of State Banks' Funds .. Projections of Exports of Goods by Major Categories, 1984/85 - 1990/91..................................... Export Projections for Timber Products, 1984/85 - 1990/91 . Projections of Rubber Production and Exports, 1984/85 - 1990/91 Composition of Exports of Manufactures, 1982/83 - 1990/91 Exports of Developing Countries, 1980-95.97 31 36 37 39 45 47 48 49 63 64 66 68 70 81 86 92 94 96 v Text Tables Table No. 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 5.10 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 7.1 7.2 7.3 Page No. The Implicit Costs of Protection for Selected Products, 1983... Projections of Imports by Major Category, 1985/86 - 1990/91.... Summary Balance of Payments, 1982/83 - 1986/87................. Summary of External Capital Requirements and Sources, 1984/85 - 1986/87............................................ Historical Commitments of Public Debt and Grants, 1979-83...... Projected Commitments of External Public Debt and Grants, 1984/85 - 1986/87............................................ Growth and Composition of Debt, 1973-83........................ International Comparisons of Selected Debt Indicators - 1982... Disbursed and Outstanding Medium and Long Term Debt, 1981-90... Regional Economic Indicators, 1980............................. Regional Development Indicators, 1971-79....................... Estimates of Net Migration and Natural Increases Components of Population Change in Provinces, 1971-80...................... Indicators of Urbanization - International Comparisons......... Total and Urban Population, September 1980, and Growth by Province, 1971-80.126 Regional Variations in per Capita Output and Consumption, 1980 Regional Variations in Poverty Incidence, 1970-80.130 Provinces where the Incidence of Deprivation Exceeded 10% in 1980.131 Per Capita Budgetary Transfers and Central Government Direct Development Expenditures 1980/81.133 Indonesia - Selected Social Indicators, 1971-1980.136 Urbanization in Indonesia, 1961-80.139 Regional Urbanization Trends, 1971-2000.140 Size Distribution of Indonesia's Cities and Towns, September 1980.142 Indicators of Urban Concentration - Selected Countries.143 Growth Rates of Urban Centers and Projected Population Distribution by City Size.144 Structure and Growth of Employment in Rural and Urban Areas, 1971-1980.146 Distribution of Rural and Urban Labor Force, 1970-80, and Projections to 2000.. Regional Trends in Manufacturing Output and Employment Growth, 1970-80.151 Implications of New Transmigration Program Targets for Population Distribution, 1980-2000.156 Total Annual Spending on Urban Services by Central and Local Authorities - Average 1979/80 - 1982/83.160 Estimated Financial Requirements for Investment in Urban Services during REPELITA IV.162 Annual Sources of Spending for Selected Urban Services 1970/80 - 1982/83... 101 103 105 106 107 108 112 113 114 120 122 124 125 128 147 163 - vi - Text Tables Page No. Table No. APPENDIX TO PART II Table Table Table Table 1 2 3 4 Regional Economic Indicators, 1980........................... Regional Development Indicators, 1971-1979................... Sectoral Growth Trends by Province, 1971-1979................. People in Poverty and Incidence of Poverty by Provinces, 1980.......................................... 174 175 176 177 Figures Figure 1.1 Figure 1.2 Figure 1.3 Figure Figure 1.4 4.1 . . Central Government Revenues in Real Terms .. Real Domestic Savings Smallholder Coffee and Rubber Producers: Terms . .27 of Trade INPRES - Real Expenditures .. .89 Real and Nominal Effective Exchange Rates . 11 12 28 - vii - SUMMARY AND CONCLUSIONS Recent Trends In Economic Performance and Policies i. After a period of sustained economic growth and development in the 1970s, Indonesia suffered major economic setbacks in 1982 and early 1983; the deterioration in the international economy, which began in 1980, adversely affected Indonesia initially through the fall in the demand for and prices of the country's traditional exports (primary agricultural commodities); and subsequently, and more dramatically, via depressed oil demand and the fall in oil prices. The adverse external economic developments, which led to heavy pressures on the Rupiah and the country's reserve position, prompted the Government to take decisive actions to deal with the immediate balance of payment difficulties facing the country and to lay the foundation for pursuing a sustainable growth path in a less favorable international environment. The more fundamental measures included the adoption of an austere budget for 1983/84; reduction in subsidies on petroleum products; devaluation of the Rupiah by 28%; rephasing public investment projects; liberalization of the financial sector; and the adoption of a far-reaching tax reform to increase and diversify government revenues in the longer term. The range of measures adopted and, equally importantly, the speed of ii. the Government's response to the deterioration in internal and external financial stability, were indeed impressive. These measures have been rewarded with considerable success in alleviating the external payments imbalance, through a combination of increased non-oil export receipts and substantial cutbacks in imports. For 1983/84 the current account deficit is estimated at about $4.2 billion (equivalent to 6% of GNP), compared with $7.3 billion (8.4% of GNP) in the previous year. The devaluation, which helped to restore confidence in the Rupiah, and the increase in domestic interest rates following the June financial reforms, also led to a reflow of foreign exchange to both the commercial banking system as a whole and to official reserves. As a result, Indonesia's net foreign exchange reserves (official and those of commercial banks) rose by about $2.0 billion to $8.4 billion at end 1983/84. iii. Given the heavy dependence of government revenues on oil export receipts, the weakening of the international oil market in late 1982 and early 1983 had a severe impact on the budget. However, the measures subsequently adopted by the Government, particularly the devaluation, rephasing of the public investment program, and further restraint on current expenditures, have contributed to an emerging healthy public finance outcome. The performance of non-oil taxation has been particularly noteworthy, partly due to the effect of the devaluation, and partly to renewed vigour in collection efforts. The Government has also been very successful in restraining current expenditures. Together with the restraint on public investment, this has led to an increase in government savings with the banking system. - viii - iv. An important aspect of the Government's economic management over the last three years has been the reduction of subsidies for domestic oil consumption and food. As a consequence, budgetary subsidies are estimated to have fallen, in nominal terms, by 40% between 1981/82 and 1983/84. Domestic oil prices have been raised three years in succession. The latest round of increases would generate public savings equivalent to about 1.8% of projected GDP in 1984. Food subsidies were largely eliminated in 1982 following an increase in the price of rice and favorable price developments abroad. The reduction in subsidies has undoubtedly had an adverse impact on the welfare of consumers at a time when incomes were depressed. By skillful economic management, however, the Government has succeeded in mitigating part of this loss by spreading its effect over as large a proportion of the population as possible while simultaneously increasing expenditure allocations to the social sectors. v. In order to encourage the mobilization of domestic savings and to reduce the dependence of the financial system on liquidity credits from Bank Indonesia, the Government introduced major reforms in the financial sector in June 1983. These measures have led to some noteworthy changes over the past few months. Deposit rates of state banks have increased sharply along with their lending rates. The increase in deposit rates has had a favourable impact on deposit mobilization with time deposits having risen by about 50% by end December. The increase in time deposits has, however, been accompanied by a shortening of maturity structure of the deposits, which, together with the reduced availability of Bank Indonesia liquidity credits, is giving rise to a mismatch between the term structures of deposits and loans. Higher lending rates have also increased cost of credit to borrowers. vi. GDP growth in 1983 is estimated to have been about 4.5% (in 1981 prices). This represents a significant improvement over the performance in 1982 when GDP growth was essentially flat. This growth was largely attributable to a rebound in oil and LNG production, but nevertheless demonstrates the resilience of the economy. Output of oil (including condensates) is estimated to have grown by about 6%, compared with a decline of 12% in 1982, and there was a significant increase in LNG production due to the early completion of two additional trains at Bontang. Preliminary data suggest that non-oil/LNG GDP increased by about 4%. Agricultural growth is estimated at 3%, compared to 1.8% in 1982. According to World Bank Atlas methodology, Indonesia's GNP per capita in 1983 is provisionally estimated at $560. Domestic inflation, as measured by the consumer price index (CPI) for 17 cities, registered a 12% increase in 1983 compared to 10% the previous year. This was a remarkable performance given the cost-push shocks to the economy, particularly those related to the rise in the prices of domestic oil products and the devaluation. Adjustment and Transformation: The Macroeconomic Framework Short-Term Economic Management. The success achieved in short-term vii. adjustment has inevitably entailed some costs in terms of growth, incomes, investment and employment during 1982-83. The question now is whether Indonesia in the year ahead will be able to restore its growth rates to at least 5% as called for in the REPELITA IV Plan. This report takes the - ix - position that it can. The recovery in GDP growth would be led by increased domestic consumer demand that should follow the r...
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