Indonesia: December 1998
Indonesia, in its worst economic recession since 1963, must continue to implement reforms and stabilization programmes if it is to revitalize its economy.
Indonesia must continue economic reforms while safeguarding access to key export markets
Indonesia, in its worst economic recession since 1963, must continue to implement reforms and stabilization programmes if it is to revitalize its economy. For their part, Indonesia's trading partners should resist domestic protectionist pressures and help Indonesia regain economic stability by remaining open to the country's exports.
A new WTO report on Indonesia's trade policies and practices states that the economic crisis which began in mid-1997 put an end to 35 years of continuous economic growth. Inflation is expected to reach between 80 and 100% by the end of this year, up from an average of 10% during the years of high economic growth. In the first half of 1998, Indonesia's GDP shrank by 12% and is expected to fall by 10 to 15% for the year as a whole.
The WTO's report and a policy statement by the government of Indonesia will provide the basis for two days of discussion at the WTO on 3 and 4 December 1998.
According to the WTO's report, the causes of the recent financial and currency turmoil can be attributed to both external and internal factors. The sudden withdrawal by international investors from Asian financial markets in mid-1997 was compounded by internal developments such as the growing uncertainty about economic, social and political stability in Indonesia. The result has been a major loss of confidence in Indonesia's immediate prospects of economic recovery. The crisis revealed long-standing impediments to growth, which have, over time, contributed to unduly high costs for the economy as a whole. These impediments include the many trade distortions that have survived the wave of liberalization in the 1980's and 1990's. In response, the authorities undertook to accelerate the pace of reforms, to engage in a major review of anti-competitive practices (including monopolies, oligopolies and cartels) and to restructure the banking system.
The WTO's report states that Indonesia ought to accelerate these reforms if it wants to restore past gains achieved by trade liberalization efforts.
While Indonesia's investment regime is now open, the WTO report notes that the increasing use of tax incentives for investment is worrisome as it tends to encourage over-investment in non-competitive sectors, increases tax revenues foregone at a difficult time for the budget, and contributes to regional tax competition. According to the report, Indonesia's continued pursuit of policies aimed at achieving a more stable and transparent business environment, including the modernization and enforcement of laws, would constitute a more effective way of attracting foreign investors.
Since 1994 Indonesia has significantly reduced its applied tariffs, with the lowering of rates going well beyond Indonesia's WTO commitments. Applied MFN tariffs have been reduced from an unweighted average of about 20% in 1994 to 9.5% in 1998. In 1998, tariffs on food items were reduced to a maximum of 5%. Nevertheless, high tariffs continue to protect beverages, motor vehicles and textiles and clothing. Indonesia committed itself to reduce the maximum applied tariff for all products to 10% by 2003. Besides tariffs, Indonesia has undertaken to remove all non-tariff barriers and export restrictions, that, until the financial crisis, continued to affect a large share of the economy (10% of imports, 40% of exports, 30% of production). In the sectors concerned, these measures were often combined with other forms of assistance, including restrictions on domestic trade, price fixing and subsidies, all of which aimed at providing protection to local producers on various grounds (including infant industry protection, management of natural resources or simply favouritism). Accordingly, restrictive licensing requirements and local content programmes are gradually being phased out. Quantitative restrictions on exports are being converted into taxes, whose rates are to be reduced to a maximum of 10% by year 2000.
Since the beginning of the crisis, Indonesia has also deregulated trade in the main agricultural commodities (except rice, for social reasons), terminated production and trade monopolies in certain intermediate industries (cement, plywood, rattan) and reduced export taxes on wood. However, with the devaluation of the Rupiah increasing the cost of imported food, it has been important that deregulation not trigger further price increases. The report notes that large subsidies are still necessary to stabilize domestic prices of essential foodstuff.
Overall, the authorities can be praised for having, in such difficult circumstances, resisted potential protectionist pressures, including the temptation to use the leeway to raise tariffs allowed by the growing gap between bound and applied MFN rates (about 25% at present).
Nevertheless, the restoration of confidence in the Indonesian economy will also entail the establishment of more rules-based, competition-oriented internal policies. In the past, the position of large conglomerates and all kinds of cartels and marketing arrangements have been facilitated by the absence of clear competition rules and a certain tolerance of anti-competitive practices. Conglomerates have been the main beneficiaries of Government support, namely the tax incentives, subsidized lending, production licenses, and trade privileges. While these conglomerates contributed to Indonesia's expansion in the past, the outcome was a concentration of production and of private debts in the hand of a few business groups. While the Government has terminated several monopolies since the onset of the crisis, further progress could be achieved in strengthening the competition framework, introducing greater transparency in the attribution of Government loans and subsidies, and effectively enforcing existing laws and regulations in the area of Government procurement.
Prior to the crisis, Indonesia's selective approach to trade and investment liberalization created "winners", namely the beneficiaries of continued protection or assistance, and "losers", that is the firms, who either did not benefit from privileges or were adversely affected by them. Since the crisis, there has been a growing realization that such distortions constitute major impediments to Indonesia's competitiveness.
The trade and investment policies followed by the Government in the past two decades have generally been beneficial to the manufacturing sector. Average MFN tariffs are low (well under 10%), except for chemicals and motor vehicles, and all industries are open to FDI. However, some parts of manufacturing continued to be assisted by high and escalating tariffs (automobile, textiles and clothing), restrictive licensing (petro-chemicals), restrictive marketing arrangements (cement, paper) and export taxes (wood products). These measures, which are legacies of old import-substitution policies, threaten the competitiveness of the industries concerned. The Government is committed to removing most of them under the present reform programme.
Indonesia is gradually abandoning its traditional reliance on Government control and public monopolies in services. Infrastructural services (telecommunications, water supply, electricity) have been largely opened to FDI, financial services have been deregulated, and significant commitments were made in the GATS. Since the beginning of the crisis, Indonesia removed remaining restrictions on FDI in services and, as part of its efforts to restructure its financial sector, further relaxed ownership limits in banking. The Government is considering a further opening up of the telecommunications services.
The report notes that current reforms should therefore be seen as a continuation, or, indeed, an acceleration, of the kinds of trade and investment policies that have greatly contributed to Indonesia's economic development and integration in the world economy over the past decade. Full implementation of these reforms, together with Indonesia's WTO commitments, could help Indonesia to stabilize its economy by 1999 and return to economic growth by 2000. The WTO's report concludes that the success of these reforms in fostering Indonesia's eventual economic recovery depends crucially on a pick-up in exports, which itself relies heavily on the maintenance of a stable, predictable and open international trading system. For their part therefore, WTO Members, many of whom already provide substantial financial and technical assistance to Indonesia, can lend further support to Indonesia's unilateral economic and trade reforms by resisting domestic protectionist pressures.
Notes to Editors
The WTO's Secretariat report, together with a policy statement prepared by the Indonesian Government, will be discussed by the WTO Trade Policy Review Body (TPRB) on 3 and 4 December 1998. The WTO's TPRB conducts a collective evaluation of the full range of trade policies and practices of each WTO member at regular intervals and monitors significant trends and developments which may have an impact on the global trading system. The Secretariat report covers the development of all aspects of each of Indonesia's trade policies, including domestic laws and regulations, the institutional framework, trade policies by measure and by sector. Since the WTO came into force, the new "areas" of services and trade-related aspects of intellectual property rights are also covered.
To this press release are attached the summary observations from the Secretariat report and a summary of the government policy statement. The full Secretariat and government reports are available for journalists from the WTO Secretariat on request (call 41 22 739 5019). They are also available for the press in the newsroom of the WTO internet site (www.wto.org). The Secretariat report, together with the government policy statement, a report of the TPRB's discussion and the Chairman's summing up, will be published in hardback in due course and will be available from the WTO Secretariat, Centre William Rappard, 154 rue de Lausanne, 1211 Geneva 21.
Since December 1989, the following reports have been completed:Argentina (1992), Australia (1989, 1994 & 1998), Austria (1992), Bangladesh (1992), Benin (1997), Bolivia (1993), Botswana (1998), Brazil (1992 & 1996), Burkina Faso (1998), Cameroon (1995), Canada (1990, 1992, 1994 & 1996), Chile (1991 & 1997), Colombia (1990 & 1996), Costa Rica (1995), C˘te d'Ivoire (1995), Cyprus (1997), the Czech Republic (1996), the Dominican Republic (1996), Egypt (1992), El Salvador (1996), the European Communities (1991, 1993, 1995 & 1997), Fiji (1997), Finland (1992), Ghana (1992), Hong Kong (1990 & 1994), Hungary (1991 & 1998), Iceland (1994), India (1993 & 1998), Indonesia (1991 and 1994), Israel (1994), Jamaica (1998), Japan (1990, 1992, 1995 & 1998), Kenya (1993), Korea, Rep. of (1992 & 1996), Lesotho (1998), Macau (1994), Malaysia (1993 & 1997), Mali (1998), Mauritius (1995), Mexico (1993 & 1997), Morocco (1989 & 1996), New Zealand (1990 & 1996), Namibia (1998), Nigeria (1991 & 1998), Norway (1991 & 1996), Pakistan (1995), Paraguay (1997), Peru (1994), the Philippines (1993), Poland (1993), Romania (1992), Senegal (1994), Singapore (1992 & 1996), Slovak Republic (1995), the Solomon Islands (1998), South Africa (1993 & 1998), Sri Lanka (1995), Swaziland (1998), Sweden (1990 & 1994), Switzerland (1991 & 1996), Thailand (1991 & 1995), Trinidad and Tobago (1998), Tunisia (1994), Turkey (1994 & 1998), the United States (1989, 1992, 1994 & 1996), Uganda (1995), Uruguay (1992 & 1998), Venezuela (1996), Zambia (1996) and Zimbabwe (1994).
The Secretariats report: summary
TRADE POLICY REVIEW BODY: INDONESIA
Report by the Secretariat Summary Observations
The period under review (1994-98) has been one of great contrast for Indonesia. After three decades of continuous growth fostered by political, social and macro-economic stability, the Asian economic crisis of 1997 has sown the seeds of major change in Indonesia's economy and political system. The crisis, and the subsequent fall in GDP, the largest among ASEAN countries, revealed underlying weaknesses in Indonesia's economic and financial structures, which prompted calls for reform. Subsequently, Indonesia embraced a programme of measures aimed at stabilizing the economy, restructuring its ailing banking system, and creating the conditions conducive to a more efficient, market-based allocation of resources in several key sectors.
Trade and foreign direct investment have been at the heart of Indonesia's economic policy during the review period. In 1994-96, the pace of trade and investment reforms had slowed somewhat, compared with previous years, with liberalization proceeding in a selective manner. In the face of the recent economic crisis, however, the Government undertook to accelerate the pace of reforms and to remove many remaining restrictions on domestic and international trade. These reforms involve, inter alia, a major review of anti-competitive practices, including monopolies, oligopolies and all other restrictive marketing arrangements that had survived Indonesia's trade liberalization in the last decade. This will contribute to a "levelling of the playing field" across many sectors, creating a more open, competitive marketplace, where few firms will remain protected.
In the period under review, the Indonesian economy went from high growth to deep recession. From 1994 to 1996, real GDP grew on average by 8% annually. Although economic activity started to decelerate in the second half of 1996, the financial crisis of 1997 transformed a soft landing of the Indonesian economy into a serious recession. In the first half of 1998, GDP shrank by 12%, and is expected to fall by 10-15% for the year as a whole. In addition, inflation has climbed from an average of 10% in the years of high growth to an expected rate of 80-100% at the end of 1998, with the sharp devaluation of the rupiah playing a role, particularly through higher prices of imported food. These have also raised the cost of food subsidies and have contributed to the budget moving from a small surplus in the 1996/97 fiscal year to a projected deficit of 8.5% of GDP in 1998/99.
Indonesia's international trade has also been severely affected by the recession in the country and elsewhere in Asia. Imports, which increased by nearly 27% in 1995, declined by 3% in U.S. dollar value in 1997 before falling by 30% in the first quarter of 1998, under the combined effects of the drop in domestic demand, the devaluation of the rupiah and a decline in trade finance. Exports, a major element that could have stimulated activity in current circumstances, have fallen (in value terms) as a result of the slump in demand elsewhere in Asia and the marked decline in domestic production, generated in part by the lack of imported inputs, with the trade finance factor and a serious shortage of containers also playing their role.
The causes of the financial and currency turmoil are multiple and complex. External factors, such as the withdrawal of international investors from Asia in the wake of the Thai, Philippines and Korean crises, were compounded by internal developments, particularly growing uncertainty about economic, social and political stability in Indonesia. The outcome was a major loss of confidence in Indonesia's immediate prospects. Macroeconomic imbalances have not been the source of market concern in the case of Indonesia. Instead, a late change of perception about the soundness of the financial system led to a dramatic reassessment of the economic risk, and, as economic conditions deteriorated, a re-evaluation of the political and social risks. The reversal of market sentiment corresponded to the excessive optimism prevailing before the crisis, which led investors, and possibly the international community, to underestimate the risks associated with economic activities in Indonesia. The significant devaluation of the rupiah, while improving export competitiveness helped slow imports, and may have contributed to a rapid transmission of the crisis to the real economy. As a consequence of these factors, Indonesia is into its worst recession since 1963.
In response, the authorities decided on the need for reform to restore confidence and set the conditions for stable sustainable growth. They have reiterated Indonesia's commitment to stable macroeconomic policies, started to restructure the banking sector and addressed long-standing structural impediments to growth, many of which had been identified in the course of previous Trade Policy Reviews. These impediments include the many trade distorting barriers that survived the wave of liberalization in the 1980s and 1990s, and which have, over time, contributed to unduly high costs for the economy as a whole. The issue of Indonesia's competitiveness had in fact already become a concern in 1996, when growth in exports, a main economic strength, started to decelerate.
As reforms will inevitably take time, the recovery of the Indonesian economy is unlikely to be rapid. After the collapse of activity in 1998, the most optimistic scenarios forecast a stabilization of the economy in 1999 and a recovery in 2000. Consequently, the living standards of Indonesians as a whole cannot be expected to return to their pre-crisis levels before the early years of the next century. Before the crisis is over, however, a substantial proportion of Indonesia's population will haveslipped back below the poverty line.
Whereas during the past three decades, Indonesia's institutional and political structures were characterized by a high degree of stability, the economic crisis that arose in the second half of 1997 created the conditions of a major political transition, involving the preparation of free democratic elections and the elaboration of a new constitution.
Until the recent financial crisis, there were few changes in administrative responsibilities concerning economic policy, apart from the merging in 1995 of the Ministry of Industry and the Ministry of Trade into one single entity, the Ministry of Industry and Trade, which is now responsible for all domestic and international trade matters. Since the crisis, however, important changes have been introduced to implement the programme of economic reforms. The National Economic and Financial Resilience Council, a body chaired by the President of the Republic, was established to supervise implementation of the reform programme. Bank Indonesia was granted autonomy over the formulation and the implementation of monetary policy. The supervision of state-owned enterprises was transferred from line Ministries to a newly-created Ministry for State-Owned Enterprises and a Privatization Board was established. Finally, the Government created the Indonesian Bank Restructuring Agency (IBRA), a financial body responsible for the restructuring of Indonesia's ailing banks.
Indonesia's legal system, particularly the laws and regulations pertaining to business, has been modernized. Prior to the financial crisis, Indonesia had already revised its Company Law and introduced new Customs and Intellectual Property Rights laws in order to give full effect to obligations undertaken in the context of WTO Agreements. Since the beginning of the crisis, the process of legal reform has accelerated. A major review of the Bankruptcy Law, the Banking Law, the Central Bank Law, the Company Law and liquidation regulations is underway. Other priorities involve the establishment of a more effective Commercial Court System and the introduction of clearer competition rules. Continued progress in these areas would make a major contribution to restoring the international business community's confidence in Indonesia.
Following significant liberalization in the period 1993-95, and, as a result of the reforms in 1998, Indonesia's investment regime is now very open. Partly as a result, Indonesia has attracted unprecedented amounts of foreign direct investment (FDI) since the 1994 Trade Policy Review. While reflecting a legitimate desire to maintain its locational advantage, the increasing resort to tax incentives for investment may be worrisome as it tends to encourage over-investment in non-competitive sectors, increases forgone tax revenues at a difficult time for the budget, and contributes to regional tax competition (with Indonesia not the only country in the region using investment incentives). Instead, Indonesia's continued pursuit of policies aimed at achieving a more stable and transparent business environment, including the modernization and enforcement of laws, will arguably constitute a more effective way of attracting foreign investors.
TRADE POLICY BY MEASURE
During the early part of the review period (1994-96), when economic growth was high, Indonesia continued to deregulate in a pragmatic and gradual manner. This approach nevertheless allowed the process to be highly selective and excluded some major sectors from reforms. Since the onset of the financial crisis, however, Indonesia has decided to extend reforms to even the most protected areas of its economy. With full implementation, these reforms will make the present period under review a watershed in the process of liberalization.
One of the most notable achievements during the review period was the significant reduction of applied tariffs, with the lowering of rates going well beyond Indonesia's WTO commitments. Applied MFN tariffs have been reduced from an unweighted average of about 20% in 1994 to 9.5% in 1998. Further unilateral tariff cuts are scheduled up to 2003 in accordance with a clearly defined programme of tariff reduction. By 2003, the maximum applied tariff for nearly all products will not exceed 10%. Already in 1998, tariffs on food items have been reduced to a maximum of 5%. Nevertheless, high tariffs continue to protect a few products such as alcoholic beverages, motor vehicles, certain basic chemicals, and, to a lesser extent, leather and textiles products. While the erosion of tariff peaks and gradual reduction of all rates will alleviate the distortions embodied in the tariff schedule, notably the level of escalation, the process is still incomplete. Producers of final goods in the manufacturing sector generally, and in the textiles and clothing and wood industries, in particular, continue to benefit from substantial tariff escalation.
Until the financial crisis, limited progress had been made in removing the array of non-tariff barriers (NTBs), such as import monopolies and restrictive licensing, as well as export controls, which continued to affect up to 10% of imports, 40% of non-oil exports and 30% of production. In the sectors concerned, NTBs and export measures were often combined with other forms of assistance, including restrictions on domestic trade, price fixing and subsidies, all of which were aimed at providing implicit or explicit protection on various grounds (including infant industry protection, security of food supply, management of natural resources or favouritism). As a result, the list of products benefiting from some form of protection or assistance was still extensive when the crisis broke late in 1997, covering most strategic food commodities, mining and wood resources, key intermediate industrial goods (fertilizers, cement, iron and steel) and transport equipment.
The removal of trade restrictions is at the centre of Indonesia's current reform process. Besides the tariff reduction programme, Indonesia has undertaken to remove all non-tariff barriers and export restrictions not justified on health, safety or environmental grounds by the end of the century. Accordingly, the number of tariff lines covered by import licensing requirements has fallen substantially (by half, overall, since the last Trade Policy Review, taking into account the fulfilment of WTO commitments). Furthermore, local content programmes are gradually being phased out. Restrictions on exports are also being removed.
More specifically, Indonesia deregulated trade in the main agricultural commodities (except rice and soybeans, for social reasons), terminated production and trade monopolies in certain intermediate industries (cement, plywood, rattan), and reduced export taxes on key commodities (wood). Further deregulation of trade, particularly additional cuts in tariffs and export taxes, is scheduled over the next two years. It is also noteworthy in this time of crisis that Indonesia has resisted protectionist pressures, including the temptation to use the leeway to raise tariffs allowed by the growing gap between bound and applied rates.
The restoration of confidence in the Indonesian economy will also entail the establishment of more rules-based, transparent and competition-oriented internal policies. In the past, internal policies contributed to the consolidation of the position of large public and private conglomerates, which continued their expansion in the absence of clear competition rules and a certain tolerance of restrictive marketing arrangements and cartels. In addition, these conglomerates benefited from tax incentives, tax exemptions, subsidized lending, production licenses and other formal and informal Government support. During the review period, conglomerates continued to dominate key sectors such as agri-food, steel, basic chemicals, pharmaceuticals, forestry and wood products, paper and communications. They often received these internal (as well as external) privileges in return for their implementation of the Government's industrialization objectives.
The authorities have moved to address a number of shortcomings in Indonesia's competition and regulatory framework pertaining to business and in its protection of intellectual property rights. Since the crisis, the Government has terminated numerous production and distribution monopolies in the cement, plywood, paper, cloves and other sectors. Indonesia also intends to introduce a consolidated competition framework by the end of 1998 and is committed to enhanced transparency both in the granting of subsidies and loans for Government-sponsored projects and for the upcoming round of privatization. The economy might also benefit from more streamlined, efficient and effectively enforced government procurement practices.
TRADE POLICIES BY SECTOR
Prior to the crisis, trade and investment liberalization had affected some sectors more than others. The provision of assistance or protection for selected sectors produced "winners", namely the net beneficiaries, and "losers", that is the firms who either did not benefit from privileges and protective measures, or were adversely affected by them. Since the crisis, however, there has been a growing realization that such distortions to competition constitute a major impediment to improving the competitiveness of the Indonesian economy. Consequently, since late 1997, Indonesia has to a large extent deregulated trade and distribution in agriculture, eliminated certain protection and trade privileges in manufacturing, and prepared further steps to liberalize telecommunications and financial services. Together, these measures are integral to Indonesia's economic recovery.
While liberalization in agriculture as well as in forestry lagged behind that of the rest of the economy until 1997, domestic and international trade was largely deregulated in late 1997 and early 1998. Imports have been the most affected, with a large reduction in tariffs and the removal of BULOG's monopoly rights concerning all commodities under its control (except rice, for social reasons). Obstacles to domestic trade are also being removed and export controls substantially relaxed.
Although the long term benefits of these reforms are evident, there are difficulties in liberalizing agriculture under the present difficult economic and social conditions. With the devaluation of the rupiah increasing the cost of imported food, it has been socially important that deregulation not trigger further price increases. Large subsidies are currently necessary to stabilize domestic prices of essential food items (including rice and cooking oil). In addition, with the devaluation of the rupiah, a number of agricultural items, in which Indonesia is self-sufficient, such as palm oil, became very competitive in the world market. It was thought that this could lead to domestic shortages, if exports materialized, and add to inflationary pressure. To deal with these difficulties, the Government introduced temporary export bans on rice, wheat, wheat flour and other basic commodities; these bans were converted into export taxes in September 1998.
The trade and investment policies followed by the Government during the past two decades have been extremely beneficial to the manufacturing sector. These policies have been continued during the period under review. Applied MFN tariffs in manufacturing have been lowered to a simple average of 9.7% in 1998. The average collected duty is even lower, given that a high proportion of production and trade takes place in duty-free zones. The opening up of nearly all industries to FDI between 1993 and 1995 helped attract large amounts of FDI.
Despite liberalization, some parts of manufacturing continued to be assisted by high and escalating tariffs (automobiles, textiles and garments), restrictive licensing (certain petro-chemicals), administratively determined local-content requirements (transport equipment), restrictive marketing arrangements (paper, cement) and export taxes (wood products). While these policies have encouraged the shift of production towards higher value-added products, by driving prices and costs above import-competing levels, they also threatened the long-term competitiveness of the industries concerned. In the context of the present reform programme, the Government is taking steps to remove trade restrictions affecting these industries.
The expansion of services has gone hand-in-hand with the overall development of the economy, which generated needs for telecommunications, transport or financial services, and with a change in policy focus. In areas such as telecommunications, aviation and financial services, Indonesia gradually abandoned its reliance on government control and public monopolies. As a result, infrastructural services (telecommunications, water supply, electricity) were largely opened to FDI in 1994-95; financial services were deregulated in the late 1980s and early 1990s; and in the period under review, competition was introduced in certain segments of the telecommunications and air transport market.
Reflecting the domestic reform process and external deregulation, foreign access to the Indonesian services market has increased. In the Uruguay Round, Indonesia made specific commitments in several services areas in the GATS, and it added to these in the recent WTO negotiations on telecommunications (1996) and financial services (1997), thereby contributing to their successful conclusion. Services are already largely open to FDI. In 1994 basic infrastructure was opened to foreign investors, provided a 5% minimum of Indonesian equity was maintained. This encouraged foreign firms to invest in telecommunications and power generation, where they have become major operators. In 1998, the (main) remaining restriction on FDI in services, i.e. that on domestic (wholesale and retail) trade, was removed. As part of its efforts to restructure the financial sector, the Government is currently considering relaxing the remaining limits on foreign ownership in banking.
TRADE POLICIES AND FOREIGN TRADING PARTNERS
The broad direction and objectives of Indonesia's trade and investment policies have not changed during the review period, but have been given renewed impetus by the present crisis. Prior to 1997, trade and investment liberalization already proceeded to a large extent on a unilateral basis, with the benefits of such liberalization being extended on an MFN basis. Current reforms are also to be implemented on an MFN basis. In several cases, they complement (financial services) or anticipate (the elimination of certain local-content requirements) the implementation of existing WTO commitments.
Indonesia's commitment to multilateralism has recently again been confirmed; in particular, this has been shown by its timely (and in some cases advanced) implementation of its Uruguay Round obligations and additional commitments in recent WTO negotiations covering information technology, telecommunications and financial services. In its relations with ASEAN partners, Indonesia adheres to the principle of open regionalism, an approach that it also promotes in the APEC forum. Tariff reductions under the AFTA-CEPT scheme of ASEAN have been kept largely in line with unilateral MFN tariff cuts, so that the margin of preference has remained small (around 2%).
Current reforms should therefore be seen as a continuation, or, indeed, an acceleration, of the kinds of trade and investment policies that have greatly contributed to Indonesia's economic development and integration in the world economy over the past decade. Fully implementation of these reforms, together with Indonesia's WTO commitments, would result in Indonesia having one of the most open economies among developing countries by the turn of the century.
For their part, WTO Members, many of whom already provide substantial financial and technical assistance to Indonesia, can lend further support to its unilateral economic and trade reforms by resisting domestic protectionist pressures. The success of these reforms in fostering Indonesia's eventual economic recovery depends crucially on a pick-up in exports, which itself relies heavily on the maintenance of a stable, predictable and open international trading system.Back to top
TRADE POLICY REVIEW BODY: INDONESIA
Report by the Government
Since the late sixties, Indonesia has made steady progress with its economic development. This progress can be easily observed by through Indonesias annual GDP growth rate, which averaged 7%, for each of the past twenty-five years. Other indications of progress include an increased per capita income and low inflation rate. In 1996, per-capita income surpassed US$ 1,000. For the last ten years Indonesias inflation rate was moderate, averaging less than 10% each year.
In the early years of development, Indonesia was still heavily dependent on the export of oil and gas. However, since the late 1980s, the manufacturing sector has replaced oil and gas as the main source of export revenue. With the increasingly diversified economy, coupled with a skilled work force and a strong commitment to free-market economy, Indonesia offers the international business community enormous opportunities for trade and investment.
Since 1994, Indonesia has made significant improvements to its investment climate. Procedures for obtaining investment approval have been simplified. Foreign investment companies are allowed to fully own their businesses. Another policy was introduced in 1995 when the Indonesian government announced the schedule of tariff reductions through the year 2003. The schedule is an acceleration of the Indonesian commitment under the WTO and contains substantial reduction of tariffs on raw materials and intermediate products needed by various industries.
The Indonesian economy continually enjoyed strong growth during the year of 1996, and first half of 1997. However, since mid-1996, Indonesia was affected by the EL-NINO phenomenon, causing severe drought in many food production centers, mass harvest failure and heavy smoke in Sumatra and Kalimantan islands.
The Indonesian economy was interrupted by currency turmoil in July 1997 which spilled over into monetary and economic crisis. This crisis has brought serious problem to Indonesian domestic and foreign trade.
Structural adjustment in all sectors is needed for Indonesia to overcome the current economic crisis through the assistance of international institutions such as the IMF, World Bank, and ADB as well as bilateral assistance. The Government has signed letters of intent with the IMF on the implementation of reformation and stabilization programs; examples include the removal of structural rigidities, improvement of fiscal transparency, and restructuring of the banking system.
Due to budget limitations, the government has set up a new revised budget for the fiscal year of 1998/1999. The revised budget is based on the following assumptions: 12% GDP decline, Rp. 10,600 per US dollar exchange rate, USD $13/barrel revenue from oil exports, and a 66% inflation rate.
Privatization program on state-owned companies has been going on under the new State Ministry of State-Owned Enterprises. The supervision of all state-owned enterprises was transferred from line Ministers to the State Minister for State Owned Enterprises by the Government Regulation 50/1998 and Presidential Instruction 15/1998. This move is seen by the Government as the first step in rationalizing the management of State-Owned Enterprises, leading to their eventual privatization. A Privatization Board, responsible for the management and privatization of State-Owned assets, was established after the first Letter of Intent with IMF.
In the process of restructuring of the banking system, 16 insolvent banks had their licenses revoked.
To boost the confidence in the banking system, the Government established the Indonesian Bank Restructuring Agency (IBRA) on 27 January 1998. In April 1998, IBRA announced liquidity criterion to determine whether a bank should be placed under supervision, taken over, closed or have its assets frozen. To date, 26 banks have been closed or had assets frozen, 4 private banks have been taken over, and 48 state and private banks are currently being closely supervised.
In accordance with legislation passed by the Development Reformation Cabinet, the Central Bank of Indonesia is in the process of becoming an independent agency.
The Indonesian economy relies on manufacturing, trade, tourism, agriculture, and the exploration of mineral resources. Manufacturing sector always dominates; for example, it accounted for 25.6% of Indonesias GDP in 1997. The main products of the consumer goods were textiles, processed foods, motor vehicles, and electronics equipment. The main intermediate goods included plywood, cement, fertilizer, metals and glass products. The second largest economic sector in 1997 was trade and tourism, accounting for 16.9% of GDP. Also during 1997, the agriculture sector, covering forestry and fishing, accounted for 14.8% of GDP. The main agriculture products for export are rubber, coffee, palm oil, cocoa, fish and shrimp.
The Indonesian economy has dramatically slowed down due to the current monetary and economic crisis. To reverse this situation, the following need to be addressed:
(i) Increasing domestic demand;
(ii) lowering inflation;
(iii) increasing non-oil/gas exports; and
(iv) political reformation.
To reverse the economic downturn, the Government of Indonesia continues to pursue prudent monetary and fiscal policies and also take action to strengthen the financial system. The government is committed to rapid economic stabilization as well as ensuring adequate supplies of food and basic necessities to all areas of the country.
Since the last review in 1994, the Indonesian Government has taken several measures to satisfy international commitments and improve the international competitiveness of the Indonesian economy. These measures clearly demonstrate that the Government of Indonesia is consistently implementing its commitments under the WTO, ASEAN and APEC.
May 1995 Deregulation Package
In May 1995, the Government of Indonesia announced a series of deregulation measures as part of its efforts to improve efficiency and endurance of the national economy, and to increase the competitiveness of Indonesian products in the international market. This deregulation package includes, among other items, the following provisions:
(v) Gradual reductions in the rate of import tariffs. All import tariffs that are currently over 20% will be reduced to a maximum rate of 20% by 1998 and a maximum rate of 10% by 2003. Import duties that are currently 20% or lower will be reduced to a maximum of 5% in the year 2000;
(vi) numerous import duties will be immediately reduced to a rate between 5% and 20%;
(vii) many current import surcharges will be eliminated or reduced;
(viii) a number of products previously protected by non-tariff barriers and which could only be imported by registered importers or importer producers, will be opened to general importers;
(ix) capital goods with a minimum value of 30% of the companies original investment which are imported by companies undergoing business restructuring will be exempted from import duties;
(x) some business sectors previously closed to new investment have been opened. These sectors include, among others, cooking oil from palms, finished/semi-finished rattan products, manufacture of industrial boilers, motor vehicle industry, aircraft maintenance, and domestic trade support services;
(xi) some business sectors are closed to new investment. These include mangrove wood processing, cyclamate and saccharine industries, manufacture of pulp using sulfite, manufacture of chlor alkali using mercury, and chlorofluoro carbon (CFC/Freon) industry;
(xii) licensing procedures for industry have been simplified. Industries in the Industrial Zone and Bonded Zone will be directly provided with an industrial license (IUI-Izin Usaha Industri) without being required to first obtain a Letter of Principle Approval. In order to expand, a company needs only submit its plan for expansion. A registration receipt, which acts as an industrial business permit, will be given to small-group industries; and
(xiii) a number of business sectors remain reserved for small business or small businesses in cooperation with medium or large businesses. Such sectors include, for example, poultry breeding, traditional hats, and tools.
1996 Deregulation Measures
In January and June 1996 the Government of Indonesia announced a set of economic deregulation measures which include:
(xiv) Continuation of the Scheduling of Tariff Reductions. In the May 1995 Deregulation Package, the Government announced the phase reduction of tariffs. One group of tariff lines is to be reduced in steps, so by the year 2000 they will not exceed 5%. Another group of tariff lines is to be reduced so, by the year 2003, they will not exceed 10%. The government is now announcing the schedule of tariff reductions (see attached table) to be implemented in coming years so the business community can best plan investment and production.
(xv) Reduction in Tariffs on Imported Capital Goods. A number of steps have been taken to reduce the tariffs on imported capital goods.
(xvi) Elimination of Tariff Surcharges. In accordance with the Customs Law, the surcharges on imported goods will be eliminated. In doing so, Indonesia accelerates the implementation of the WTO commitments.
(xvii) Simplifications of Non-Tariff Barriers. To expedite the procurement of capital goods and raw materials and to improve the efficiency of industry, several non-tariff barriers have been eliminated. These steps also reflect the acceleration of Indonesias commitment under the WTO to reduce the number of non-tariff barriers.
(xviii) Regulation on Anti-Dumping. To counter dumping practices by foreign exporters, the Anti-Dumping Regulation has been introduced. This measure is consistent with the WTO Agreement on Anti-Dumping.
(xix) Facilitation of Exports. Simplification of requirement and procedures to obtain the Certificate of Origin, elimination of inspection of export goods by Surveyor, and elimination of the PEB document for exports with a value of Rp 100 million or less, are measures adopted to facilitate export.
(xx) Simplification of Licenses for Industry within Industrial Estates. To increase export activities, the Government simplified license requirement for industries within the Industrial Estates.
(xxi) Operation of Bonded Areas/Bonded Warehouses. The operation of Bonded Areas and Bonded Warehouses, which could previously be done by state enterprises, is now opened to the private sector.
(xxii) Relaxation of Restrictions on Export and Import Activities by Foreign Investment Manufacturing Companies. Some latitude is given to foreign investment manufacturing companies for import and sale of their own products up the wholesale level.
(xxiii) Simplification of Procedures for the Import of Waste as an Industrial Raw Material. Procedures for the importation of waste as industrial raw material will be improved and adjusted under Customs Law.
1997 Deregulation Packages
On 7 July 1997 the Government announced the economic policy deregulation as a continuation of the preceding series of deregulation packages. The economic policy reform in this deregulation package included: reduction of import tariff, private auction house, non-direct investment company, transfer of capital goods, export without notification, regional taxes and redistribution and non tax revenues in the industry and trade sectors. The purpose of this package was to decrease bureaucracy and increase exports.
Starting from 17 September 1997 the Government reduced the import duty on raw and auxiliary materials for certain products covering 153 tariff items. This reduction was implemented to stimulate export oriented industries and to increase the sustainable national economy.
The range of the reduction of import duties is between 5 to 10 percentage points, and the final tariff will become zero, 5, 10 and 15 percent. The reduced duties apply to raw materials for: textiles (40 tariff items), wood processing (67 tariff items), basic chemical products (31 tariff items) and leather products (9 tariff items).
The raw and auxiliary materials for steel, machinery and automotive and agriculture products, are respectively 3 tariff items each.
Indonesian Economic Experience in 1997
Over the past three decades, Indonesia has reaped maximum benefits from structural changes that were created to achieve a more integrated global economy. The maintenance of macroeconomic stability through the pursuit of prudent fiscal and monetary policy, financial sector reform, and greater openness of the economy have been the keys to this success. During this period, the economy grew at an average of almost 7% a year, inflation was contained at a single digit level and the economy became more diversified, with the private sector having a greater role in the economy.
The second half of 1997 marked the beginning of the Indonesian economic downturn as reflected in the slowdown in economic activities, soaring prices, and weakening of financial institutions. The battered Rupiah exchange rate coupled with high interest rates led to a slowdown in many economic sectors.
The economy is estimated to have grown by only 4.65% in 1997, far below the performance of the previous year. The slowdown accounted for the weakening domestic demand, mainly consumption and investment in both private and public sectors. The weakening domestic demand was reflected in a much reduced pace in expansion of the bank loan for investment and consumer spending. The inflation rate rose significantly, reaching 11.05% in 1997, fuelled by the depressed Rupiah exchange rate, and the long drought associated with the change in the global climate that adversely affected agricultural output.
Indonesian Economic Policy in 1998
Recognizing the problems confronting the country, the government of Indonesia has introduced various programs and adjustment measures. As a member of the IMF, World Bank, and ADB, Indonesia frequently consults these institutions and invites them to provide advice about how to improve the economy. On 15 January 1998, the Government adopted the Program of Economic and Financial Reform and Restructuring. This program was formulated to cover actions in several areas including: efforts to restore financial sectors, fiscal consolidation, monetary issues, the exchange rate, and structural adjustments in the form of broadening and deepening the deregulation program. To complement and modify the Memorandums of 15 January 1998, the Government of Indonesia signed two Supplementary Memorandums on 8 April 1998 and 24 June 1998.
Considering its broad scope and its coverage of a number of economic aspects, the program will be implemented over the three-year period. Its implementation will be closely monitored and reviewed. To that end, Indonesia will be assisted by experts from the IMF, World Bank, and ADB.
The fundamental objective of the structural adjustment program is to increase national efficiency and competitiveness of the Indonesian economy. To accomplish this objective, the steps to be implemented include:
(xxiv) On 21 January 1998, special tax and customs benefits previously granted to the National Car Program were discontinued.
(xxv) A gradual reduction of import tariffs, including those on chemical products and iron/steel, to 10 percent in the year 2003. Starting on 1 January 1998, import tariffs on a large number of chemical products were reduced from 10 20 percent to 5 percent. Most tariffs on iron/steel will also be reduced starting January 1999.
(xxvi) Starting 1 January 1998, various commodities, such as wheat, wheat flour, soybean and garlic, can be imported freely under General Importer status. Currently, soybean and garlic imports are subject to a 20 percent tariff and wheat and wheat flour imports are subject to a 10 percent tariff. They are to be reduced to 5 percent in the year 2003, and the administered retail price of cement has also been abolished.
(xxvii) A reduction of obstacles hindering exports, including export taxes, is to be implemented in stages.
The main structural elements of Memorandum of Economic and Financial Policies include further deregulation, trade liberalization, privatization of state enterprises, improvements in the banking system and corporate restructuring.
While medium-term outlook remains uncertain given the severity of the crisis, the objective of the Government of Indonesia is to restore sustainable economic growth with low inflation as quickly as possible.
The Government of Indonesia attaches the highest priority to ensuring that food and other essential items are available at affordable prices to the entire population. Food prices, particularly the price of rice and cooking oil, have risen drastically since the beginning of May 1998, causing serious social hardship. While most private trade is functioning well, the Government is taking a number of actions to ensure that there are no remaining impediments to the efficient movement of basic commodities throughout the country.
The program also envisages that virtually all of the restrictions that have been in place over time will soon be removed. For instance:
(xxviii) From 1 February 1998, BULOG monopoly is limited solely to rice;
(xxix) the Clove Marketing Board is eliminated by June 1998;
(xxx) all restrictive marketing arrangements are abolished by 1 February 1998, specifically: cement, paper, and plywood;
(xxxi) all formal and informal palm oil plantation barriers are removed by 1 February 1998;
(xxxii) effective on 1 February 1998, tariffs on all food items were cut to a maximum rate of 5 percent, while tariff rates on non-food agricultural products were reduced by 5 percentage points; and
(xxxiii) on 29 May 1998, the Government adopted a reformation policy on investment in which the list of Sector Closed for Investment was revised.
Sectors Closed for Investment
(i) Primary Sectors
Cultivation and Processing of Marijuana and the like
Exploitation of Sponges
Contractors of Forest logging
Hazardous Pesticides of Penta Chlorophenol, Dichloro Diphenyl Tricholo Ethane (DDT), Dieldrin, Chlordane.
Production of pulp using Sulphite processing and production of Pulp with whitening Chlor
Alkalin Chloride Industries using Mercury process
Manufacturing of Choloro Fluoro Carbon (CFC/Freon)
Manufacturing of Cymate and Saccharine
Processing of mangrove wood to produce finished/semi-finished goods
Firecrackers and fireworks
Explosive Materials and the like
Manufacturing of weapons and related components
Printing of valuable papers
Commercial Paper of Bank Indonesia
Sectors Closed for Investment when a part of the shares are owned by foreign citizens and/or foreign legal entities
Freshwater fish and fresh water fish cultures
Forest Utilization Right
Private television broadcasting, Radio broadcasting services, News Paper and Magazines
Operation of cinema
Spectrum Management of Radio Frequency and Satellite Orbit.
Trade Services and its support Services, except: Retailer (mall, supermarket, department store and shopping center), Distributor/Wholesale, Restaurant, Quality Certification Services, Market Research Services, and After Sales Services.
Medical Services: general clinics, maternity Clinic, specialist clinic and dental clinics.
The ratification of Marrakesh Agreement has been done by the government of Indonesia on 2 December 1994. The government supports the role of WTO in strengthening the multilateral trading system and commits to the implementation of the obligations and responsibilities arising from the Uruguay Round. This was shown by Indonesian commitments in WTO which recently includes information technology, telecommunication, and financial services.
Concerning the implementation of the UR results, Indonesia abolished most of the non-tariff barriers it committed to in Schedule XXI. Furthermore, the Government has also eliminated import surcharges since June 1996. The remaining non-tariff barrier is in the oil sector.
As a member of the WTO, Indonesia has implemented the WTO Valuation Agreement since 1 April 1997. Since that time, the determination of customs value for the imported goods is based on the provisions of the Agreement. Moreover, Indonesia created the following instruments in the form of law and regulations, such as Custom Law No.10/1995; Ministerial Decree of Finance No. 690/KMK.05/1996; Circulated Letter of Customs Director General No.SE-11/BC/1997; Director General of Customs Decree No.KEP-14/BC/1997 and No.KEP-21/BC/1997. In line with the implementation of the Agreement, Indonesia also revised its import procedures to accommodate the new customs valuation system. Thus, the imported goods are processed through a green or red channel. The selection for the green or red is based on the risk assessment conducted by intelligence unit.
Since 1994, Indonesia has undertaken a concerted exercise to improve existing IPR protection and procedures according to international standards and practices as prescribed by all international conventions and intellectual property rights. Efforts are also underway to enact new laws and amend existing ones in compliance with WTO/TRIPS Agreements. As of May 1997, Indonesia enacted three new laws in the field of IPR, namely:
(xxxiv) Laws No.12 of 1997 regarding The Amendment to Law no.6 of 1982 on Copyright, as amended by law No.7 of 1987;
(xxxv) Law No.13 of 1997 regarding The Amendment to Law No.6 of 1989 on Paten; and.
(xxxvi) Law No.14 of 1997 regarding The Amendment to Law No.19 of 1992 on Trademark.
Steps are being undertaken to fulfill Indonesias WTO/TRIPS obligations by the year of 1999. Enactment of new laws, namely, for the protection of plant varieties, performers right and lay-out designs of integrated circuits as well as minor amendments to the existing patents and trademark laws are at various stages of drafting.
Indonesia has put into effect the most favored nations for all WTO members and has never changed the status since mid 1995. As for information, the Ministerial decree of Finance signed on January 21, 1998 mentioned reducing the tariff with MFN system for all nations.
The Implementation of Regional Initiatives
Indonesia attaches strong importance to regional cooperation and continues to participate actively in various regional groupings, such as ASEAN and APEC.
As one of the Bogor Declaration initiators on trade and investment liberalization on 2010 for industrialized economies and 2020 for developing economy APEC members, Indonesia has committed to continual liberalization on trade and investment. Indonesia will continue to pursue tariff reductions in line with its trade liberalization efforts and commitments in ASEAN and APEC.
Indonesias priority is focused on efforts to enhance trade and economic cooperation within ASEAN in the field of trade and services, intellectual property rights, transportation and communication, infrastructure development and industrial cooperation.
To implement the ASEAN-AFTA commitments, Indonesia has taken measures since 1994 to lower its tariffs, and renewed the schedule of tariff reduction for AFTA by the year of 2003, which includes 7.212 tariff lines. Those tariffs consist of Inclusion List (6.622), Temporary Exclusion List (541), Sensitive List (4), and General Exception list (45).
The current economic crisis will not change Indonesian commitment to implement CEPT-AFTA scheme by the year 2003.
Over the years, the government has consistently demonstrated its ability to maintain its commitment to economic development. However, due to unprecedented economic turbulence since mid 1997, the governments first priority, in short-term, is to stabilize economic and political situations. The most urgent priorities for the government are improving the distribution system and ensuring adequate supplies on basic need commodities.
The government of Indonesia is committed to continue the reform program covering 5 main components:
(xxxvii) Maintaining macro economic stability;
(xxxviii) reforming and strengthening the banking system;
(xxxix) restructuring corporate debt;
(xl) pursuing structural reform to improve governance and private sector efficiency; and
(xli) taking action to protect the poor and sustain key human resource investments.
Indonesia will continue to uphold its commitments to the international community. Back to top