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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