BRIEFING NOTES ON CURRENT ECONOMIC SITUATION IN INDONESIA

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001900010170-9
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 17
• Document Creation Date: December 19, 2016
• Document Release Date: May 23, 2006
• Sequence Number: 170
• Publication Date: February 11, 1974
• Content Type: MF

 Approved For Relea~sg 6/~O~~ C~CtI f.,l R , 78 R00190001 70-95'x/ c0
Y/A5011uc,iuu, D.C. ZOGOS
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CIA No. 7996
11 February 1974
DIE:?;OI hNDU 1 FOIL: William II. Bray
Department of the Treasury
Office of National Security
Room 4400
Washington, D.C. 20220
SUBJECT . :Briefing Notes on Current Economic Situation
in -:Indonesia
25K1
H
1. In keeping with our earlier agreement, I am
forwarding the attached briefing notes on the Indone::.Lan
economy for Mr. Simon's use. These materials, presented
earlier as an oral briefing for Ambassador-Designate Newsom,
are intended to present some of the highlights of recent
economic trends. They are not intended as analysis in depth
of any particular sector but simply to convey a broad
impression of the most striking recent developments.
ll~lid ~L1L
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Orig. & 1 - Addressee
2 - D/S
1 - D/OER
1 - St/P
l - St/CS
1 SA/ER
2 - S/.EC
1]. I?'ehructr (S--5920)
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 ~l?1 i) 1~~ i j
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i,concmic ilr :,ci- in In~enosia
I. Recent 111-story
The present Indonesian administration, which assumed porter
in July 1966, faced the task of rehabilitating an economy left
virtually in ruin after 20 years of Sukarno rule. Sukarno's
last seven years -- the years of the so-called "guided economy",
beginning'with?the final ousting of the Dutch-ih 1958 -- had
particularly disastrous effects on all economic sectors.
Nationalization left a once progressive and efficient estate
sector in a state of decline. Irrational pricing policies and
a failure to maintain thn irrigation 'system resulted in food
production increasas far below the rate of population growth.
Manufacturing showed no growth after 1961, as no ,attempt was
made to replace Dutch and other expatriate investments.. Virtually
nothing was done to'tap the country's rich mineral resources.
Transport and communications facilities -- never adequate --
were allowed to deteriorate, thus reinforcing a?nationwide pattern
of market isolation. Meanwhile budget deficits increased
enormously. The combination of declining revenues from a
stagnating private\sector, and increasing expenditures both
for chauvinistic display and expanding military and civilian
bureaucracies created inflationary pressures of almost
unbelievable proportions. The price index rose from a base of
100 in 1953 to nearly 4,000 by the end of 1965. The foreign
trade sector in which the Dutch and other foreigners had been
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predo:rinant, and which ha,l produced a large share of gIovernmont
revenue, showed steady deterioration over the 7-year period.
tiediuri- and long-term foreign debt necessary to finance growing
international payments deficits e::panded enormously by 1965
to $2.4 billion, 60% of which was owed to Communist countries.
After Suhaxto's takeover, the -government's priority
objective became stabilization, a goal. that has been consistently
and on the whole successfully pursued. Immediate relaxation
of exchange controls and the introduction of a more realistic
exchange rate were followed in successive years by credit
stringency and budget balancing. Public *sector investment
was concentrated on the most urgent reconstruction needs. Trans-
port services were quickly restored to meet minimal requirements.
An internal policy of decontrol, which established near normal
market conditions, and intense efforts at restoration of the
irrigation system were important factors in boosting agricul-
tural and industrial output. The balance-of-payments position
showed steady improvement aided by new measures to encourage
foreign investment which drew substantial funds into oil,
mining and timber, and large amounts of program and project
aid provided through the IGGI, a 9-nation consortium organized
to rescue Indonesia from economic collapse. A rescheduling of
debt to Western nations was also made possible through the ICGI
while similar arrangements were made with Communist countric::.
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Although many Indonesian officials are inclined to take
refuge in the supposed lintitlc:s supply of petroleum when the
difficult question arises as to development prospects, none
would deny the enormity of the problems the country has yet
to face. Nonetheless, recent economic performance shows a
dramatic improvement over the last years of the Sukarno
era. Whil6.1ndohesian statistics are notoriously unreliable,
the following tabulation is adequate as a broad indicator
of this progress in recent periods.
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Sclccted Economic Indicators:
Average Annual Rates of Crowth
(19G0 pricr':%)
1960-64
1964-68
1968-?72
Gross Domestic Product
2.1
3.~7
7.3
Private Consumptiu,t
2..8
4.6
4.7
Gross Domestic Investment
3.2
3.9
24.6
Exports of Goods and Non-
Factor Services
1.2
3.0
19.0
Imports
1.4
4.8
18.1
Agriculture
1.5
1.0
5.3
(Food Crops)
(-0.7)
(3.7)
(2.5)
Mining
2.0
2.0
10.6
Manufacturing
2.?5
3.3
10.5
Construction
-5.0
.9..1
MO
Trade
0.5
3.7
12.7
Services
2.5
2.6
5.8
'Transport and Communications
0.5
.14
9.0
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II. Current TrontIs
A. Agriculture
The agricultural sector has played an important role
in the economic recovery, but still has managed only to keep
pace with population growth.. The gove'rnment's, principal
long-term problem is to increase food production. Rice, which
accounts for 50.% of the value of agricultural production and
4010 of employment, had shown significant increases in production
before the drought-afflicted crop in 1972. Output increased
at an average rate of 9% annually from 1967 through 1971,
compared to an average annual rate of 3.3% for the previous
4-year period. Growth stemmed'mai.nly from restoration of
minimum levels of transport, input supply, credit, and marketinV.
Fishing and forestry also have shown sizable jumps in output.
Secondary crops, however, have grown only slowly, nearly all
of the increase occurring in the Outer Islands. Production
increases of estate crops, palm oil, sugar, rubber, tea, coffee,
and cocoa have been only modest due to the lack of management
and trained personnel, the lack of government extension ser-
vices, and a'credit policy focused nearly exclusively on rice.
The Indonesian food problem is -almost entirely a
Javanese problem. . Java, roughly the size of New York State,
accounts for about 6% of the nation's land area and for about
65% of its 126 million people. A population density of some
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1,300 persons per squa::e i-idlc: makes it: o:ic or the most, over-
crowded places on earth. Opportunities for increasing
cultivated acreage have long been exhausted. Indeed, rice
acreage has not increased in ten years. All production
increases have had to depend on raising yields. This has been
accomplished in recent years by the rehabilitation of irri-
gation systems, more intensive use of high yielding varieties,
and more liberal agricultural credit policies. ;Although
enthusiastic acceptance of family planning programs is a hopeful
sign, some observers believe that the Java situation poses
nearly insurmountable problems of poverty, land fragmentation,
and pressure on natural resources. There is little doubt that
denuding of forest lands in Java for production of dryland
crops, such as corn and cassava, has already resulted in
serious erosion and watershed damage. A decline in inland fish
production has been attributed to more intensive use of insec-
ticides. Efforts at land reform have met with little success.
Although there is no reliable data on the extent of land
tenancy, a 1960 Ministry of Agriculture estimate put it at 60%
countrywide, and even higher on Java. An Agrarian Reform
attempt in 1970 was doomed at the start, however, since an
owner retention limit of 5 hectares was.permitted -and, according
to one later estimate, only 0.9% of land owners held more than
5 hectares. Thus virtually no land was available for distri-
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bution. The average holdiu~j on Java is now put at only
0.7 hectares, which must support an average of 6-7 family
members.
Rice -- The country has more or less recovered from the
serious production shortfall in 1972 and the subsequent rice
shortages in late 1972 and early 1973. Aggressive rice pur-
chases abroad allowed for substantial injections into urban
markets : through. the first half of 1973.. Initial government
efforts to obtain rice locally from the April-June crop were
in vain, however. In July 1973, after it became apparent
that the considerable pressures on farmers being exerted
through the BUUD (village cooperatives) were ineffective,
internal procurement quotas were abandoned.* The government
then withdrew restrictions on domestic movement of rice and
shifted its release policy to one of stabilization at higher
price levels. Shortly thereafter rice finally began flowing
to market and the government was able to sharply curtail
release operations. The 1973 dry season crop was a good one
and by the end of the year private stocks had been substantially
replenished.
The 1974 rice outlook is clouded by uncertainty about.
fertilizer supplies. Preliminary esti.i aces of planting for
* Use of the I3UUD to pressure farmers may have seriously
harmed the whole concept of cooperatives in Indonesia. Rather
than strencIthcning the bargaining position of farmers as
originally purported, the, I3UUD were used by outside authorities
to force extra concessions from them.
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COHE:DE 1~! ii',i..
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t. at se asC::1 cr7) t: ?rlJ.-Jilne) \:'~tL4 1.a-)1 ., I)uL t.ht?rt
is now some doubt as to a:hrther. the ubsLantial.ly h.i.tthor
fertilizer import targets -- 1,500,000 tons in FY 74/75
(Aril-rd~_rch) compared with 866,000 Lons.in F1 73/74 -- will
be net. Delays and defaults .on imports previously contracted
for have already been a factor in the current p.wanting season --
though how significant is uncertain.:. pf.fi.cials are counting
on the oil lever to insure sufficient imports of Japanese
fertilizer and are hopeful that adequate supplies will be
available for the dry season crop (September-November).. In
any case, higher domestic rice prices have. boosted farmers
incentives sufficiently to compensate at least in part for
fertilizer shortfalls.
B. Industry
Industrial' growth since 1968 has been rapid. Up to
this cime many problems inhibiting growth under Sukarno had
continued to plague industry, mainly a scarcity of foreign
exchange and low productivity, partly the consequence of
restrictions on laying off surplus labor. This was especially
the case in state enterprises that contribute a large proportion
of total output in chemicals, fertilizer, cement and basic
metals. Growth averaged 15.6t annually between 19G8-71.,
according to national accounts data, but slackened to 9% in
1972, due at least in part to the shortage of raw materials
from the agricultural sector. lxpansion hc; been most rapid
in import replacing industries such as fertilizer, paper, yarn
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operaticul:,. ;:ot:!c inclustrio:,, notably cct!cnt
and tc::tiles, were hampered by 'capacity constraints in 1972.
The country is still on the threshold of industrial develop-
ment- and growth has been from an extremely low base. Manu-
facturing accounts for only 91U' of GNP and is dominated by a
few industries. In 1970 87% of value added wash generated in
only four sectors: food and beverages, tobacco, textiles and
rubber.
High industrial qrowth rates are virtually -assured for
the next few years simply on the basis of planned investments,
those in progress, and others in train that have yet to reach
normal output levels. Government measures also contribute to
a favorable outlook. Recent adjustments in credit policy will
insure availability of funds to small investors, licensing
procedures have been simplified, and industrial estates are
now being established. Planned investments indicate most rapid
cgro~.th will be in textiles', fertilizer, cement, rubber, tires
and assembled products... A. boom in the construction industry
is also apparent from -the tr~nd'?'in project approvals.
Extractive industries are also expanding very rapidly.
Forestry continues to attract sizable foreign investment,
,mostly Japanese. Three foreign companies have been granted
licenses to mine tin in the Bangka area. Bauxite deposits will
also be exploited more intensely; two huge aluminum plants --
a combined $750 million investment -- are now scheduled
9 _
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fo]' CO::; ~Y'C:Ct1Cn. 1 ,.r cje i'.''rcic f: i.]'1'. :;L''1::1.~ : l ive a.i.;o bt.?~:11
made rec ntly in nic :c:l and copper mininrl.
C. riscal Policy
Until recently stabilization me asuros imposed severe
constraints on the government's ability to mount a -strong
development program. Inflationary pressures have weakened
tax administration and eroded staodsirds of?cgmpliance. The
potential tax base 'was thus not realized. F- balanced budget
meant e:xperidi'tures had to be trimmed to meet' 'receipts, but
'the necessity of increasing routine expenditures left insuffi-
cient funds available for development purposes.
In the last two years revenues 'increased as a proportion
of (,NP from 10.5 to 12.8% due entirely to doubling of receipts
from corporation taxes on oil companies. Government receipts
from import tariffs declined over the past two years as the
composition of imports shifted towards low duty or exempt
items ' (there are generous exemptions on capital goods). Taxes
on luxuries are low and conspicuous consumption in Jakarta
.attests to the fact that high incomes are not taxed effectively.
If oil is excluded, receipts as a portion of GNP were stable
at 8.4%.
Routine expenditures increased from '8.'7;; to 9.9% of GNP
over the same period. Those expenditures have been inflated
by salary demands and by the need for heavy subsidies. Since
taxes on domestic 'consumption are less than total subsidies
which account for 82 of routine expenditures (18% if petroleum
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..:)1C: L.ia::lly i:_ ....'13.1)!?1u world ..1']:'. t r.LCi?- 41 '-J
pro .'ra:n aid valued at dor.:cot3.c price:: are includeeii) , there
is a net subsidizaLion of dome. tic consumers. Provision oJ:
rice to ~lovornmcnt servants is a particularly heavy burden,
amounting to some 700,000 tons annually.
Domestic financing of the development bUdgdt rose from
.37% in `FY. '197,0/'/1. to. 46% in FY 1972/7:3,. The balance was
financed.by,couriterpart funds and project aid.
FY 1974/75 prospects are somewhat brighter.. Although
subsidies required to maintain the price of fertilizer (urea)'
to farmers under the BIMAS program will increase, rice sub-
sidies should decline substantially. In 'addi'tion, oil revenues
will be sharply higher, increasing the room for expansion in
the development budget.
D. Money Supply and Prices
Government measures over the last several years were'
extremely effective in 1%ringing rampant inflation under control
by the.end of 1971.* Inflation is once again, however, the
government'?s most serious short term problem. Since mid-1972
monetary expansion has been excessive. Money supply expanded
by 50. in the last half of 1972andby an additional 341U in
-the 'first three quartoxs of 1973. The external sector has
boon the predominant factor in the expansion. Additional
25X1
resources flowed into Indonesia at an annual rate of over
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Liz '.1 cn dur? nq t 1.,.3 sc:c:~as 1972 ;std tLu ; .i r: L It .I .
cci: 1973 clue to hi99!tur prices for oil .ind other primary
exports, rapidly expanding foreign investment and large
inf1ot:w: of short term capital. (including hert,u:~~ na borruar.i.nj)
Bank credit to the private sector and to state enterprises
became a significant expansionary factor in early 1973 when
the demand for funds increased markodly as,a!xesult of buoyant
construction. and. other investment activity and :the need for
larger working balances due to price rises.
The huge growth of the money supply did not appear to be
a significant influence on prices until mid-1973. The general
price index rose 23% in the last quarter of 3:973, *but most
of the increases were concentrated in food items, particularly
race, which was in very short supply. Imports helped stabilize
rice prices through' 1973 but a second more broadly based wave
of price increases began in May 1973. The consumer price
index rose another 2.3% during the first 11 months of 1973'partly
attributable to higher import costs but certainly owing in some
measure to monetary expansion.
The government has taken measures to limit the effects of
foreign capital inflows on the credit base by raising reserve
requirements on non-resident time deposits from 5% to '30C and-
has made the ceiling on these deposits applicable. to non-resident
banks. Beyond this, credit control will continue to rely on
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v:,ri.:.nt oll- has rc:sultect in the replacemt. t: of scvcral bank
presumably owing to their performance in a:ecuting government
policy on credit restraint:.
E. Balance of Pa ments
Indonesian trade ?J;,rts shown an enormous ,increase over
the last two years. Higher production end prices of crude oil.,
sharply higher prices of other exports, and currency realign-
ments . contribtted to estimated export earnings of $3.4 billion
in 1973, a 150% increase over the 1971 level. Earnings from
timber exports were triple their 1971 value due to both
increases in volume and higher prices, -and. the declining trend
in rubber exports was sharply reversed in early 1973 due
mainly to higher prices. Total earnings from rubber for the
year will be nearly. double the 1971 level. Earnings for tin
and palm oil will also show substantial increases due to
'higher world market prices.
Imports show a nearly commensurate increase over the two
year period due partly to high r prices but also to large
volume increases in imports of both food (rice and wheat) and
capital goods, th=, 'atter reflecting higher levels of project
aid and private investment activity.
In 1973 higher payments for non-oil services, primarily
investment income and freight charges for the higher level of
imports resulted in an overall deficit on net goods and
services of $800 million, double the 1971 level. However, an
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off:.et,.ing tat.: lc.s;: of funds un0cr the LS PL-4020 progr..im) 1110
a considerable ju:.-..) in direct investment resulted in a sub-
stantial 1i11provel,b::nt in the Indonesian reserve position.
Gross reserves, amounting to less than $200 million at the
end of 1971, rose to '$900 million by October 19143, equivalent
to about 4?months of imports.
The, outlook 'for?1974 is quite favorable. Net receipts
from the oil sector will rise substantially as a. result of
the increase in the selling price of crude from $6 to $10.80
per barrel effective 1 January 1974. Prices of rhibber should
remain high due to world shortages of petroleum-based synthetic
rubber. Imports of capital goods and fertilizer will increase
but food imports will be substantially less. While -debt
service payments will be somewhat larger -- these amounted to
about 80. of gross exports in 1973 -- increases in foreign aid
and private capital inflows will ensure an overall balance of
payments surplus of at least $200 million.
r% i' D"!--- 'I n
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