INTELLIGENCE REPORT INDONESIA: RECENT CHANGES IN FORTUNE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T00608R000500200011-4
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 34
• Document Creation Date: December 16, 2016
• Document Release Date: November 9, 2004
• Sequence Number: 11
• Publication Date: April 1, 1975
• Content Type: IR

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Intelligence Report
Indonesia: Recent Changer in .Fortune
Confidential
ER IR 75-10
April 1975
COPY N ?_ 71
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CONFID NTIAL
Indonesia:
Recent Changes in Fortune
In the last few years, Indonesia has shifted fro;.. heavy dependence on foreign
financial aid to rr position of relative financial independence. 1-Iigh world prices,
particularly for oil, pushed exports to the US $3 billion mark in 1973, contributing
to a gain of more than $200 million in foreign exchange reserves. The performance
in 1974 was even better as oil brought the Indonesians $2.2 billion, and their
exchange reserves rose to some $1.5 billion.
Accompanying the strong foreign sector gains was real annual growth on the
order of 8`10-10`/~ during 1973-74. This surge beyond earlier average rates of 6`/77`/
came from a combination of improved agricultural performance, increased oil
output, contract revisions that allow Indonesia to keep more of the gains from
oil, and the related stimulus to other sectors.
Although Irving standards have doubtless improved, oil revenues have yet to
be translated into major development gains for most Indonesians. The majority
of them live on Java in crowded urban slums or farms too small to support tl~e
average family. While there is great potential for increasing agricultural yields and
farm incomes over the longer term, only limited progress has been made in this
area so far. The result leas been a large-scale migration to urban areas, where jobs
are soli relatively scarce and living conditions poor. Many of the resulting social
problems and political pressures have been difficult for the Suharto government
to control.
More rapid inflation has recently begun to distort economic and social progress.
The ~ ndonesians had .ample experience with inflation during the 1960s and have
carried through effective stabilization programs, but the institutional base for
controlling rapid increases in the money supply and prices is still weak. In 1973,
prices rose more than 30`I~; in 1974 new monetary and fiscal regulations failed
to keep inflation below 40`l~.
Note: Comments and queries regarding this report arc welcomed. They may be
directed to the Office of Economic Research,
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Notwithstanding the serioas social cnd economic problems Indonesia faces,
the outlook for rapid gains over the rest of this decade is generally gofld. No
sii~ificant increase in foreign catnings is expected in 1575. Barring a sharp downturn
in oil prices, however, exp?rt revenues should thereafter rise steadily as the
developed world recovers from the current recession., These earnings, combined
with moderately increasing net capital inflows, would amply cover financial capital
requirements for nation?1 output growth on the order of 7?/?-9%.
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1. For the first time in modern history, Indonesia has begun to show some
of the grotath its large resource base has long portended. The legacy of aid clientism
appears to be at end, but there are signs of other pressures that could threaten the
stability of government. An ~inderstanding of these new directions and pressures
requires soma perspective on key economic events since the mid-1960s. Drawing on
chat base, this report focuses on the surge in ~?owth in 1973-74 and considers
Indonesian development needs and prospects in the coming years.
.Recent Eco~,omic Experience (1967-72)
2. T:Ze Sukarno era left the Indonesian economy with much to overcome:
Particularly du,~n~ the period of "guided democracy" (1954-65 ), when development
was subordinated to political and milit::ry objectives, Indonesia's economic
performance was poor compared with that of other LDCs. Alth^.ugh otl:~rs faced
similar obstacles to growth because of inflation and large internatia7ai payments
deficits, conditions in Indonesia were especially severe, as average :eal incomes
declined. The effects of this decline were sharpened by the population p~ assurr-s on
Java, the third most densely populated large area in the t~orld.
3. The abortive Communist coup of 1965 and subseque;~t fall of the
Sukarno regime provided the sort of clean break with the past th2t allowed the
introduction ~f completely new economic policies. Urged by creditors and
international organizations, the new administration of General Suharto embarked on
a major stabilization program and began relaxing some of the controls that had
hobbled the private sector. In a buoyant world economy, results were not lonb in
coming. During 1966-72, inflation slowed from an ajim~al rate of almost 1,000% to a
low of 4% (see Figure 1). In the sane period, real GNP growth climbed to an average
of 6%-7% per year, compared with less than. 3% in the early 1960s (see Figure 2).
Gross investment as a share of GN,?, encouraged by stability and government
incentives, rose gradually to reach 17?lo in 1972, more than double the share ducirig
the Sukarno era tree FiZ'ure 3).
Engines o f Gr o wth
4. Financial stability was the first priority for ~uharto's new government.
The buJget was balanced in 1967, largely because of improved revenue collection
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Indonesia: Growth of
Money Supply and
Cons:~mer Prices FIGURE 1
Indonesia:
Growth of GNP FIGURE 2
and the move to put responsibility for its
preparation and implemei;tai,on in the
hands of a single governrnent agen~.y.
Cre~iit tightened as interest rates were
raised to 9^o monthly inst~:ad of annually.
As a result, the money supply grew only
130?lo in 1967, compared with nearly
75010 in 1766, and its growth continued
to taper off through 1971.
5. Determined to give the mar-
ket a chance to work, Suharto adopted a
general policy of decontrol at the same
time. Price controls were limited to a few
basic commodities, and quantitative im-
port restrictions were virtually elimi-
nated.Import tariffs were raised, and the
export tax lowered. Concurrently, the
2
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Indonesia:
Investment as a
Share ofi GNP FIGURE 3
~ I I J ~, I~ I i I' i I
fixed exchange rate system was replaced
by a simpler, more flexible multiple-rate
system to help discourage less essential
imports and encourage exports. A new
law granted liberal i;-centives and assur-
ances to foreign investors, and foreign
properties nationalized in 1965 were re-
turned to their owners. State industries,
previousl;/ enjoying favored access to
foreign exchange and subsidized credit,
were forced to _~~ly more on their own
resourcPS for rehabilitation and expan-
si~~n. Further interest rate reform in 1968
brought about a rapid increase in time
deposits in state banks.
6. These policies restored confi-
dence for both domestic and foreign
businessmen, a point that could soon be
observed in key economic data series.
Wholesale price increases, which earlier
had reflected the strong drive to hoard
goads, began to taper off only a year after
th.e major stabilization measures were
introduced, acid the relevant price index
actually declined in 1969. Domestic in-
vestmentjumped 40% in 1968 and contin-
ued to grow more than 20% annually for
the rest of the period. i;l 1968, after
1962
64 66
68 70 72
several years of stagnation, direct foreign
555517 4.75
investment began an upward trend. For-
eign creditors once again began to
believe that the Indonesians could service larger
amounts of debt, and official long-term loans began a steady climb in 1967, with an
increase for that year alone of $130 million.
7. Renewed domestic stability coincided with a world boom that eased the
way for Indonesia to expand its exports nearly 15% annually during the period, an
above-av:,rage performance for LDCs in this stage of development. Thus, trYe export
sector, which included traditional agricultural products as well as the more aggressive
petroleum industry, was able to make an exceptionally strong contribution to GNP
growth.
a
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Evolution of Natio-ral Policv
g. With more rapid grov~th, economic policies were directed at improving
domestic stability, irate*national rayments, and some institutional short~~omings.
Reflecting the pressures of creditors (who had agreed to massive debt rescheduling)
and the conservative philosophy of IMF advisers, economic policies tended to stress
international solvency and domestic credit restraint. This financial conservatism,
however, often meant limited support to such "unknown" risks as the farmer ar
smell businessman.
9. Although economic policies did not deal directly with increasing
incomes in the agricultural sector (where most Indonesians are employed) or with
providing jobs for the growing urba~i population, some limited progress was made in
these areas. In keeping with its policy to increase foreign exchange revenues, the
government encouraged traditional agricultural exports, which benefited farmers
w$o grew those crops.
10. Some progress was made toward greater self-sufficiency in foods, even
though per capita rice consumption steadily increased. Commercial policies and
government attitudes toward foreigners made it easier to bring ~n needed chemicals
and modern techniques. Supported by new monetary policies and institutional
changes, rural credits for fanners increased 80%-or roughly 50% in real
terms-during 1968-72. Together, these factors permitted an introduction of
High-yielding strains on 18?!0 of total riceland. This facilitated increases in rice yields
averaging 6% annually during the period despite near-constant prices.
11. No particular program was instituted in the cities to increase incomes
or employment. Nevertheless, encouraged by government policies, increased
domestic and foreign investment boosted manufacturing and construction, which
had stagnated during the Sukarno years. Growth in these industries, and the
accompanying expansion of the services sector, providLd many new jabs.
12. In short, the government learned much about the rile of budgets and
monetary policy in controlling inflation. Although it did not deal directly with the
longstanding problem of realigning the domestic market in ways that would assure
the most rapid and widespread growth, the overall economic stability and prosperity
tended to have some positive effect on the living standards of many Indonesians.
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13. Despite the considerable economic gains in tlus period, relatively little
headway was made against some basic problems that have plagued Indonesia
throughout its history. Agriculture and food marketing remained splintered into
largely isolated local markets because of both inadequate internal transportation and
inept government pricing policies. The financing and implementation of public
works and much-needed improvements in the educational system were severely
inhibited by the weakness and lack of training of the bureaucracy. Extremely low
salaries for government workers continued to encourage corruption, a problem as
intense in Indonesia as in other nations of Southeast Asia. Heavy reliance on foreign
technicians was not matched by a parallel effort to build irp indigenous technical
and administrative skills. In short, as has occurred a number of times in Indonesia,
there was rapid growth in export lines and national output without commensurate
diffusion of economic and social progress among the populace.
14. Although aspects of these problems could be cited in other LDCs, their
sheer scale and intensity in Indonesia-particularly on Java-make them especially
serious as sources of political ferment. Encouraged by visible signs of commercial
progress, peasants swarmed into Jakarta throughout this period to help drive its
population up some 1.3 million during 1967-7? and make it the fifth largest city in
the developing world. Efforts to accelerate a rath~r limited birth-control program
had little impact on a population growth rate of about 2.5% by the end of 1974.
Developments in 1973-74
15. The most prominent feature of Indonesian gains in 1973-74 was the
rise in foreign earnings that accompanied the boom in the oil sector. Indonesia's net
earnings from oil (see Appendix A) were up nearly 600% during the period. This was
caused by dramatic price increases, a change in production-sharing arrangements that
gave the government a larger share of the export revenues, and an output gain of
2.9%. Non-oil export commodities also benefited from strong world demand and
high prices. Export earnings were supplemented by continued large-scale aid, and the
net result was a 160% increase of foreign exchange reserves.
I6. The rapid improvement on external accounts pe,~ttritted greater
government spending for consumption and development. Although budget data arc
still too sparse to trace the public sector's spending fully, there arc some general
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indications of how it was allocated. Pertamina,l an important contributor to
development spenai,ig, was involved in a number of large projects in heavy industry
and petrochemicals that absorbed much foreign exchange. Civil servants' salaries
were increased at several intervals over the period. Food imports, primarily rice,
were t.lp dramatically as the government moved to build food stockpiles. Fertilizer
imports, which the government subsidizes, also increased substantially.
17. The private sector was slow to catch up with the rapid pace of
government spending. Consumption-in the National accounYS sense-rose only 3% in
1973 but probably more than 10% in 1974 as income gains began to be distributed
more widely. Imports of a variety of consumer goods increased almost 20% both
years. With the exception of textiles, domestic industries producing directly in
response to spending appear to have expanded considerably faster than during
1967-72. Foreign funds arrived in ul~precedented amounts despite the student upset
of January 1974 and boosted investment in manufacturing for the growing domestic
market.
18. Even with this surge of spending and investment, the growth of
Indonesian productive capacity substantially lagged the income gains. Rapidly rising
food prices abroad and the weakness of the Indonesian central monetary system also
contributed to int1ation of about 40% during 1974. Consequently, stabilization
policies re-emerged as key concerns for the first time since the immediate
post-Sukarno days.
Growth in Real Output
19. Even discounting the distinctive feature of international gains, the
petroleum sector rontintted to show rapid progress that only slackened in mid-1974.
Crude oil production rose 23%o in 1973 and another 4% last year (sec Table I ). In
1974 the increase in a;u?nings retained by the Indonesians in the sector was much
larger than the production gain, however, because of new income-sharing
arrangements with foreign oil companies concluded early in the year. For 1974 these
factors resulted in net returns of $2.2 billion from oil exports and leceipts in
kind--$1.6 billion more than in 1973-thereby supporting a 30% gain in the
contribution of the mining sector to GNPz (see Appendix B). Oil revenues were
1. Pertan>na, Indonesia's state-owned oil company, has a monopoly over the tefming and distribution of
all pe~rolcum products in the domestic market.
2 The impetus for growth on this order was present even before developments in the Middle Gast, but
the dramatic series of price increases beginning in late 1973 caused some acceleration in exploration activities.
Foreign oil companies spent nearly SI billion during the two-year period in addition to Pertamina's own
outlay of more than SS00 million.
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Indonesia: Petroleum Production and Export Earnings'
',
1970
1971
Mill
1972
ion Barrels
1973
19742
Crude oil production
312
326
396
489
510
Exports
264
274
345
426
440
Crude
228
240
299
370
390
Refined products
36
34
US $
46
aer Barrel
56
50
Average price of crude (f.o.b.) 1.69
2.08
Mil
2.87
lion US $
4.00
11.92
Value of oil exports 471
559
877
1,348
4,690
Net government receipts 158
205
330
565
2,194
1. Oil export data for a given calendaz year represent carvings from shipments lagged by one quarter (see
Appendix A).
2. Estimated.
sufficient to cover two-thirds of total government expenditures in 1974, compared
with one-third in 1973.
20. Hard minerals-primarily tin, copper, and bauxite-also registered a
strong performance in 1973, but this slowed somewhat in 1974 with industrial
recession in the principal market, Japan. There were no new foreign investment
approvals in mining during the period. Established foreign mining companies are,
however, pushing forward with surveys, exploration, and development. Alcoa
continued exploration and planning for a facility to produce 1.6 million tons of
alumina annually from low-grade bauxite in East Kalimantan. The International
Nickel Company began construction of a plant to produce nickel matte.
21. The importance of oil and minerals notwithstanding, agricultural
performance remains the key determinant of Indonesian growth; gains here were
encouraging. Favorable weather aided agriculture in 1973, and output increased 6?l0
over the drought year of 1972. Growth was about the same in 1974. Rice
production rose to 14.5 million metric tons in 1973 and reached 15.3 million tons in
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1974. Production still falls short of domestic demand, however, and imports in both
years were in, the range of 1.2-1.4 million tons. Much of the imports went into
building government rice stocks that had grown to 900,000 tons by October 1974, a
vast improvement over 1972's low of 180,000 tons. The presence of these stocks
and the general adequacy of market supplies kept retail rice prices3 far enough
below government ceiling prices4 to curtail the need for market intervention.
22. The failure to achieve the goal of self-sufficiency in rice by 1973-74
was caused in part by the soaring price of fertilizer and other chemical inputs that,
despite government subsidies, far surpassed concurrent increases in crop prices. The
loss of incentive for the farmer to use chemical inputs meant that agricultural yields
did not increase as rapidly as planned. Although the government imported about
600,000 tons in 1973 and another 1 million tons in 1974, the availability of
fertilizer at the village level was hampered by distribution problems resulting from
high transportation costs, poorly located market outlets, and untimely arrivals. In
addition, government regulations often limited fertilizer use to certain crops and
areas.
23. Yet some important steps are in train to increase yields. The support
price of paddy was raised in April 1974 to help compensate farmers for tree
increased cost of inputs, particularly fertilizer. Another price rise went into effect in
February 1975. In addition, government plans for increasing output should make
Indonesia self-sufficient in fertilizer by 1980, even allowing fora 15% annual
increase in consumption. Despite the technical problems involved, the government is
also encouraging the establishment of capital-intensive rice estates by domestic and
foreign private enterprise. Pertamina and two US companies are working on an
estate in south Sumatra that will begin small-scale production in 1975, and
according to present plans will be producing 300,000 tons annually by the end of
the decade. Caltex is ttndertaI:ing a feasibility study for a similar project in central
Sumatra on a smaller scale.
24. The output of other domestic feod crops, while stagnating in 1973,
rose in 1974, spurred by higher prices and increased acreages and yields. BIMASS
3. The price of rice is particularly important for stabilization efforts, as rice accounts :or 30% of the
cost-of-living index.
4. Recognizing the constraining effect of artificially low official rice prices on production, the government
adopted a more flexible rice-pricing policy in late 19']2 and has allowed the official ceiling price to rise
gradually in keeping with market forces.
5. I3IMAS is an agricultural extension program designed to help farmers obtain credit and improve their
use of irrigation, fertilizers, high-yielding seed, and new a~icultural techniques.
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programs were extended to corn, cassava, soybeans, peanuts, cotton, and
smallholder sugar crops. ;-~~~ore attention was also given to improving fertilizer and
insecticide distribution and to bringing more irrigated land into the program.
25. After years of stagnation, traditional export crops responded well to
the boom in world commodity markets, which lasted through the first half of 1974.
Rubber production, for example, was up 15% in 1973. To assure smallholders a
share in the benefits of higher prices, measures were taken to organize farmers into
project management units, to establish a nucleus system under which large estates
would provide technical assistance to smallholders, and to establish rubber
coagt.ilating centers to process raw materials. The government also subsidized
high-yielding seedlings for smallholders. Other export crops, including palm oil,
coffee, tobacco, and copra, also registered increased output during the period.
26. The production of timber, the largest non-oil export crop, was up 25%
in 1973, but growth slowed to around 5% in 1974. Causes of the slowdown included
sharp declines in construction in the United States and Japan and excessive cutting
in recent years. In response to botli these factors, the government enforced
reductions in output in the second half of last year, a move in keeping with the
recent tendencies to discourage further foreign capital from moving into cutting and
to restrict foreigners to joint ventures in proc:,ssing.
27'. Data collection on manufacturing industries is weak in Indonesia
because much production occurs in small enterprises scattered outside the major
cities. Progress during the period was not particularly impressive largely because of
the sluggish performance of textiles; growth in 1973 was only 3%, with an upsurge
to 8%-10% in 1974. Nevertheless, new capacity created in industries such as cement,
chemicals, and vehicle assembly should pave the way for more rapid expansion of
production in coming years.
International Payments Gains
28. The most striking feature in the 1973 international payments picture
was the unanticipated boost to oil prices, a trend that greatly intensified in 19'/4. Oil
accounted for almost half of Indonesia's export revenue in 1973 and climbed to
more than two-thirds in 1974 (see Table 2). The volume of oil exports rose a
dramatic 23%, to 426 million barrels in 1973. Shipments were slightly higher in
1974, but softening demand in the fourth quarter prevented a significant increase
over the previous year's exports. Nevertheless, net oil receipts nearly quadrupled to
s
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Table 2 -
Indonesia: Dolnnae-~of?Payments Summary
1972
1973
1974'
Exports (f.o.b.)
1,757
2,957
6,890
Oil
877
I ,348
4,690
Non-oil
880
1,609
2,2 ^0
Imports (ca.f.)
-1,403
-2,679
?4,320
Oil
?30
-43
?200
Non-oil ~
-1,373
-2,636
-4,120
Trade account
354
278
2,570
Invisiblcs
-832
?1,083
-2,761
Non-oil services
-315
?343
-465
Oil
-517
?740
-2,296
Foreign oil company profits
-300
-428
-1,038
Foreign production costs ("write off")
-117
-170
-675
Pertatnina production costs
?100
?142
?583
Current account
X178
?805
-191
Private capital (net)
427
498
700
Direct investment (net)
258
290
455
Other
169
20R
245
Official capital (net)
385
550
635
Loans/grants
447
624
735
Debt repayment
?62
?74
-100
Overall 5alance
334
243
1,144
Net errors and omissions
53
?10
-459
Change in official reservesZ
-387
?233
-685
Yearend reserves
574
807
1,492
1. Estimated.
2. A nunus sign indicates an increase in reserves.
$2.2 billion as the average price per barrel of Indonesian crude rose to nearly $12
from 1973's $4.
29. The spectacular petroleum developments tended to mask some sharp
gains in other export lines, which rose above the $2 billion mark in 1974 despite the
slowdown in the second half of the year (see Appendix C). Moreover, there were
signs of some broadening of the export base, and investment in key resource areas
brightened prospects for more rapid growth with industrial recovery in the
developed world.
30. Imports (c.i.f.) reached $2.7 billion in 1973 and increased to an
estimated $4.3 billion in 1974, reflecting buoyant domestic demand and high world
io
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prices. Sharply rising capital goods and imports, particularly for petroleum
production, acid higher food and fertilizer prices were Irlrgcly responsible for this
trend, Also putting upward pressure on import expenditure was the acceleration of
dcvclopmcnt project-related imports in the last quarter of 1974.
31. Nct private capital inflows increased in both years. Direct investment
in 1973 reached $290 million and was up to $455 million in 1974, dcspitc new
restrictions on foreign investment (sec Appendix D). Much of this capital is
associated with Pertami,~a investments, where the strictures relating to domestic
equity participation or cl.~sure of certain sectors to forcil;n investment arc likely to
be ignored.
32. Official capital inflows wcrc some 15`/~ above the previous ycstr's Icvel.
In 1973 the IGGI pledged $840 million in aid to Indonesia; $(~24 million was spent
by the end of December. Contrary to earlier expectations, foreign aid continued at a
relatively high Icvcl in 1974, dcspitc improvements in Indonesia's
balance-of-payments and budget positions. Actual expenditures of IGGI aid in 1974
wcrc an estimated $585 million, somewhat Icss than in 1 c~73. Ilvwever,
disbursements under a Japanese Government-to-govcrnmcnt loan for dcvclopmcnt of
the oil sector brought another $150 million, for a total of $735 million.
33. Indtanesia paid $124 million on official external debts (principal and
interest) in 1973 and. was scheduled to pay another $145 million in 1974. 'I'hc.
govcrnmcnt has failed to respond positively to suggestions by its creditors that debt
repayment be accclcrrtcd, so rcpaymcnts will most likely continue to follow the
schedule. Total public debt scrvice~ as a share of gross commodity exports was
about 7`I~ in 1974, down from 9`/n the previous year.
34. These payments patterns taken together netted foreign exchange
res~:rves of $ I.5 billion by the erd of December 1974, an increase of 50.7 trillion
ove>~ 1973. Reserves of such magnitude-equivalent to about 4 months' imports -arc
a new pllenomcnon in Indonesia and will widoubtedly be a major factor in donors'
aid decisions in 1975.
6. Intcrgovemmcntal Croup on Indonesia (IGGI) members include Australia, Auxtria, (Iclgium, Canada,
I~rancc, West Germany, Italy, Japan, the Netherlands, New Zealand, Switzerland, the United Kingdom, and
the United States.
7. Tfus includes rcpaymcnts on public corporation loans as well as official govcrnmcnt loans.
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/nJlnNonnry /'resvvr~rc~.v
35. I~ur the first time since 1')~iti, inflation bec:unc a serious problem in
1973-7~. Prices in Jakarta rose 32''x, ;rrd about 4t)"~, in these two ye;rrs, Sornc of this
wars clue to external factors. Inflation for Indonesia's trading partners, compounded
by the efl'cctivc depreciation of the rupiah relative to the yen, Icd to higher import
casts. Import prices rose 88"? l>Llwccn 1972 and the third quarter of 197 us
reflected in the I'ollowinh tabulation:
I')7.t
1974
I
II()
1
1S5
II
12')
II
IHI
III
14(.)
III
I Fib
IV
1GU
Rice, fertilizer, and ccntcnt imports were among the itcrns whose prices skyrocketed.
3(,. On the domestic side, inflationary pressures were intensified by rapid
increases in credit to the private sector and state enterprises, which nearly doubled
in 1973 anti continual an upward trend in early 1974. The ult~~;?~te wurces of these
funds were increased non-oil export earnings and forci~,u capital. The latter was
attrrcted to time deposits by higlt interest rates and the unproved credit rating of
private (artd I'ert;unina) burrowers.
37. I)ornestic institutional factors also crnttributed from the supply side to
inflation. As usual, goods shortages occurred in more remote areas because of
inefficient local transportation; credit applications for small businessmen wcrc
delayed in administrative bottlenecks; and complex customs procedures often
prevented imported goods from getting into the market on ahcdule. C'omrption and
bureaucratic ineptness wcrc also important factors.
3ti. 'The various institutional impediments to price stabilization wcrc
similar to those Indonesia faced in the 1960s. What was distinctive about the
I c)73-74 case was that the source of much of the excess liquidity was not
uverworkinF of government printing presses, but the rapid net inflow of money from
export earnings. New politics wcrc required to deal with this new source of
inflation.
iz
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1'nllry hurnn~fnNon !n l/rc~ New lipvlrunrncnl
39. Ilecausc Indonesia's financial position chrutged so rapidly in 1973-74,
the government slid not have time to adequately dcvelup~a concerted program to
allocate its newfinntd wealth in a way that wc,uld best serve its three major goals;
controlling inflation, reducing income i>>cquality, and providing for long-term
development needs. 'I'hc policy mix adopted brought the economy a few steps closr.r
to cash goal but rcve;t{cd that the governn.cnt has yet to decide exact;y whsrt its
priorities arc.
4U. 'l'he government, which still accounts for a remarkably small portion of
national expcndiiures, proved inadeduatc to the task of acting as a conduit for the
greatly increased export earnings. Despite plsutned ~iU`I~ increases in both current and
dcvcloptncnt nudgets in 1974 and an 80'I~ paY raise for government workers, the
mc,st notable event of the period was a shortfall in receipts in late 1974--and
possible deficit--lx:causc of revenues withheld by Pcrtamina. Nevertheless, the
government showed some capability in manipulating fiscal policy as demonstrated
by increases in luxury taxes and cuts in taxes on mass consumption goods. In
addition, the govcrnmcnt pressured Pcrtamina to curtail its foreign borrowing and
submit to closer scrutiny of its financial activities.
41. Pcrtamina, vaunted as an aE;gressive agent of development, expanded its
extrabudgctary role with mixed consequences. With a company budget of $2 billion
(roughly half the size of the combined current and capital accounts of the national
govcrnmcnt), it continued to move into housing, office buildings, hotels, roads,
fertilizer plants, and metalworking plants. This further branching out, combined
with cost overruns from inflation and a shortfall in projected 1974 oil earnings,
restrltcd in a debt cnrnch with foreign crec itors and a g5G0 million tax delinquency to
the govcrnmcnt.
42. Anew monetary policy package directed toward stemminE; consumer
credit expansion, incrcasinE; domestic servings, and controlling foreign borrowing was
introduced in early 1974. Intcrest talcs on savings deposits and for sornc state bank
lending were incrcascd. Credit ceilings wcrc imposed on commercial Hanks. Reserve
requirements for state and foreign banks wcrc incrcascd. Private enterprises wcrc
required to deposit 30~I~ of all foreign loans in non-Intcrest-bearing accounts with the
Bank of Indonesia. Alt}tough t}tcse policies were correct~y aimed at major sources of
inflation during the period, they wcrc difficult to enfarcc because the state banks
are powerful enough to effectively circumvent the will of the central bank when
they wish to do so.
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43. The government chose not to ap~rrcciutc the rupiah to promote
increusec! imposts. It continued to subsidize food and ('crtilirer imports, however,
and attempted to streamline the customs bureaucracy to 1'acil~tatc more rapid flow
of imported goods into the country. Moreover, capittrl goods imports for
development projects were accelerated during the last duarter of 1974.
44. The economic outlook for Indonesia over the next five years or so appears
bright, 1luring 1975-7C, the key stimuli for growth will be continued access to
foreign capital and incroasing domestic demand for foods and consumer goods.
'I'hcreafter, industrial recovery in the developed world should again provide the
basis for rapid export expansion. With no sharp break in oil prices, Indonesia s}could
wrjoy 1'orcign cxchant;e revenues throughout the period that will permit avr~rage
national output gains of 7`%m9`/o (close to those of 1973-74). Significant as this
Ixrformance may appear, it will hardly produce an aftluent society; given the
expected population expansion, per a~,pita income in 1980 will be on ,hc order
of $''00 to $225 (1974 prices), compared with about $150 :rt present.
Srctur Pc~rfurmarcc~
45. Some of the most important developments should occur in agriculture.
After years of erratic support and uncoordinated intervention, the govcrnrnent has
recently allowed greater play for market incentives. Without abandoning this new
position, it will be taking on greater responsibilities for extension services and public
investment to support farm production. Irrigation, new technology, and credit arc
being channeled to other crops after initial concentration on rice. Projects arc in
train to bring more land under cultivation in the outer islands and to develop
a number ol? large rice estates. The government is expected to boost expenditures
in transportation and communications to enhance domestic marketing. Moreover,
domestic fertilizer production -primarily from Pertamina projects -will increase
sharply in 1977 and should rise steadily for the next several years. By 1980, plans
call for an incrcasc of 20`I~ in rice yields as a result of increased fertilizer application,
double-cropping, and expansion of high-yielding varieties, which will make up close
to two-thirds of total acreage, compared with one-third at present. World demand
for food and other a}~icultural products should begin to rise after the current
recession. On balance, these factors promise agricuitural growth on the order of
4`/-5 ;4 .
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4G. Although petroleum output is temporarily stagnating, there is every
likclih~od that it will shortly begin to movi? upward. The recent reef-type discoveries
hove the potential to push crude production up to 3 million barrels per day by
1980. The current world recession, conservation rnca5trrcti, and attempts to expand
alternative energy sources by developed countries will limit demand in 1975.
Subsequently, the Indonesian uovcrnment will probably push production as r.rpidly
as demand allows and is unlikely to participate in formal or informal prorationing
schemes within OI'I:C. Similarly, the fact that, oil company contracts in Indonesia
allow the highest per-barroi return among Ul'EC countries virtually assures that
the companies wilt be motivated to rnaximizc production. Around 1978, sales of
liquefied nrtural gas (LNG) will begin to add to petroleum earnings. A 20-year
contract has been negotiated with a group of Japanese utility and industrial
cons~~.mers for 400,000 barrels (crude oil equivalent) of LNC- per da;;, worth some
$?2 billion (1973 prices) over the life of the contract. Annual growth of cncrgy
production during 1976-80 is not likely to fall much below 10`/~ tu~lcss oil prices
deteriorate markedly.
47. Manufacturing probably will grow faster than in any comparable period
in Indonesian history. Foreign investment interest in non-oil proj~:cts showed no
signs of flagging last year despite tightening of investment laws, as Japanese
invcstrncnt approvals alone increased $450 million, or 68`~~ over 1973. Netherlands
approvals also ~ncreasal by roughly $100 million, and Hong Kong approvals rose
to a total that rivals the United States for second place. Although l1S non-oil
investment was down to one-fifth the :,vcrage of thr past seven years, this tends
to overlook active negotiations for multi-million dollar projects in petrochemicals
and mining. Government programs call for expansion of manufacturin{; on a wide
scale. Toward the end of the 1970x, several large industrial projects arc scheduled
to come on stream, including fertilizer plants, petrochemical installations, oil
rc("incrics, and the cour~try~s lust steel carnplex. A variety of installations also will
be opening in processed foods, metal fabrication, finished lumber, and construction
materials. In swn, the government looks for 13'h average annual growth in
manufacturing through 1980; allowing for the usual lags in implementing projects,
an estimate of 10`i~~ is probably more realistic.
48. Other eco^~~mic sectors will respond to this broad growth. Domestic
commerce should prosper as output increases and transportation and
communications facilities improve. The tempo of industrial constnrction will
continue to boom, and there will remain a sustained demand for new ol'(ice space
and housing. Crowih in services will most likely continue its present trend as
incomes rise and incrcascd urbanization affords more opportunity for jobs in the
cities.
Ia
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/nlcrnuNunn! I'uy-nt.~nts
49. We estimate that Indonesii- will require average import growth of 20"~,
(14`/c~-l 5`/, in real terms) to achiuvc 7"~r9'/~ real growth in nntional output. ~~ithough
this is roughly comparable to what occurred in 19(17-72, programs to increase
domestic production of some consumer ar~d producer goods will allow the capital
goods component to grow more rapidly than in the earlier period. Continued
emphasis un food output, for example, will greatly reduce the need for food
imports. flans to expand capacity for fcrtili?rer, cement, chemicals, steel, and sugar
production will allow import substitution in raw rnatcrials and internlediatc goods.
The result will be capital goods imports rising al a rate of 30`I~ (25`/, in real terms)
or more, sufficient to support the projected growth path.
S0. hrdonesia should have little difficulty financing this growth of imports,
even without concessionary aid. We expect rapid increases in both oil and other
exports once recovery from the current global eeO11o111IC il'eCStilall bet;InS. The only
reasonable contingency that could create serious balance-ol'-payments problems far
Inctoncsia during the next few years would be a major break in oil prices. We
du not lxiieve such a break to be likely, at least through 1077; indeed, oil price,
in 197(,-77 arc likely to increase at about the same rate as the prices of the goods
Inclunesia imports. l3eyund 1077, prospects for the international oil market arc
much nwrc uncertain; prices could decline, but, if OI'1?C sticks together, there
would he strung incentives to push prices up further to relieve the growing
balance-ol'-payments pressures on m;tny UP1:C countries, at least temporarily.
51. Table 3 presents wha: we believe to be a reasonable prajcction of
Indonesian balance of payments through 1980. It shows continuing surpluses
throu{;h 1979, with I~ureign exchange reserves building up to more than ~4 billion,
or more than two and one-half times the current Ievcl. A deficit is projected
txginning in 1980, but only on the assumption that oil prices amain constant
after 1977, while import I~rices contin.re to rise.
$~. We project roughly a doubling of exports dut7ng 1975-80. Oil alane
should bring in $9 to ~ 10 Billion by 1980, as production reaches some ~.'' million
bld." LNG shipments, scheduled to Begin in 1978, will further Boost earnings.
Non-oil exports, targeted for increased diversification in the current development
plan, also have go. 1 prospects. 'The traditional raw material exports such as timber,
8. This output Ievcl is based on no increase in 1975, a 7^. increase in 1976, and a 10`,'rrnnual increase
thcrcaftcr.
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Intlonedn: Dalnnoe-of?Peymentn ProJectioner
1974
1975
1976
Million US
1977
S !n Curre
1978
nt ?riccn
1979
1980
fxpnrts
G,890
7,440
8,810
IU,lGO
11,710
13,210
14,750
Imports
4,320
?5,190
?G,240
?7,40
?9,020
?10,790
?12,920
Trndc account
2,570
2,250
2,570
2,G20
2,690
2,420
1,830
Invisiblos
?2:7G1
?2,820
?3,030
?3,350
?3,G90
-4,000
?4,470
Current occount
?191
?570
?4G0
?730
?1,000
-I,(r40
?2,640
Cnpitnl nccount~
1,335
I,1G0
1,250
1,370
1,500
1,680
1,870
Change in reserves
GSS
590
790
G40
500
40
?77~
Ycnrcnd reserves
1,490
2,080
2,$70
3,510
Percent
4,010
4,050
3,280
Inflation rntcs
assurncd for
Oil exports
0
8
5
0
U
0
Non?oll exports
0
G
F;
5
5
S
Non?oillmports
G
G
G
5
5
5
1. These proJecttons are bared on the following teal growth rotor:
1. OU exports: 096 In 1973, 7761n 1976, 1096 theroafter.
2. Non?oli exports 096 in 1975, 596 in 1976, 1076 thereafter.
3. OU imports: 096 U 1975.7961n 1976, 1096 thereafter.
4. Non?aU Imports: 1596.
S. OU invislbles: 076 in 1973, 796 in 1976,1076 thereafter.
6. Non~U invisibks: 1196.
7. Omcial apltal: ?3096 in 1975,096 therc~ftcr.
8. Private ppiW: 1396.
2. Including e;ebt service payments.
rubber, and hard minerals will expand steadily, especially in view of previous
lapanesc and US investment in these areas and Indonesia's reputation as a reliable
supplier in both these markets. Light manufactures, chemicals, new food crops,
and processed fish arc among product lines likely to grow more rapidly in coming
years.
53. Official capital inflows will most likely level off at about $500 million
annually. Traditional donors will probably decrease their lending to the $300 to
$350 million range in response to Indonesia's improved financial conditions. Most
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new loans arc ~.tssurned to ttrkc the form of credits from official export banks
abmad and to be larE;ely on conuncrcinl tcrtns. 'i'he romaining $150 to $200 million
will come from draWdOWns in the I(;CI aid pipeline. Although there has bccn
much discussion of development loans with the Soviets and Gast Guropcans, no
significant commitments httvc yet bccn made and such amounts as arc received
from the Communists in this period will likely ranain modest.
S4. Outside of the oil sector, private capital inflows should be up about
15"~~ annually, in line with import growth. Although the projection appears
conscrv.,tivc in view of the 1967-'12 average increase oC SO"/~, total foreign
invcstnlcnt in Indonesia has already reached a high Icvcl -- more than $1.5 billion -
and the capital-intensivt; mining and forestry sectors arc now being closed to
foreigners. Future priv,;tc funds will probably be drawn to joint ventures in
manufacturing anct medium-term loans for dcvclopmcnt projects in such areas as
translx~rtation, communications, real estate, and utilities. Despite new, more
stringent forciE;n investment regulations, the government will continue to court
forcit;n investors to itclp support its ambitious development plans.
Dcvr/unnrrnl CO1r.SCpSUS and Stra~cXlrs
55. Within these broad thanes, the particular course taken by the economy
over the next severtl years will be strongly intluatccd by the ways in which the
Indonesian govcrnrnent adjusts to its new gains. Gvcn this year, with foreign
exchange reserves up sharply and the volume of imports growing rapidly, Jakarta
is preoccupied with an anomalous short-teen foreign debt crisis at Pertamina that
can only srrvr to rcrnind the Suharto administration of how recently the country
tits recovered from the chaos of Sukarno. Spurred by these reminders and by
shrinkages in official aid from t}te 1GG1, senior officials can be expected to continue
major efforts to drum up support abroad among Communist and other
non-traditional donors, and they will behave for some time in ways that highlight
the nations underlying poverty rather than its recent additions to earnings.
SG. As the Indonesians becorac more accustomed to sustained growth and
greater financial flexibility, various faction, will begin to fucus on particular
dcvclopmcnt strategics. For the :+tamcnt, rapid dcvclopmcnt through
9. In keeping with accounting conventions, ail sector investment, which automadcrlly reverts to Indonesia
and is written off by the foreign companies when productiun begins, u included in the invuiblcs account
in the projections in Table 3.
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capital-intensive resource inveshncnt has captured the attention of most politicians,
planners, and 1'ertamina officials. II' present advisers remain close to Suharto, the
emphasis on dcvclopnrent through this route is likely to continue, qualified only
by the concern that I'oreigrt exchange holdint,~ be kept fairl;~ high.
57. 'there will probably continue to be some social unrest. lttrpid growth
in manufacturing and services and increasing productivity in fanning will continue
to encourute further migration of unskilled workers to urban areas. Consequently,
the slur;! population of Jakarta and other cities will grow steadily, providing a
stark contrast to improving living standards among employed workers. The most
serious dishrrbancc in rocent tirncs has co-nc from student agitators, who with
other pressure groups can be cxpectccl to exploit the income gap through
demonstrations and other political activities in coming years. Nevertheless, so long
as the top military leadership maintains its present conscraus on goals and methods,
the Suharto regime should have sufficiently strong hold on domestic order to assure
that these intermittent pressuros will not significantly alter national economic
lx~licy.
39
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25X1
Tublc A-1 is a summary of available information on lndonesiu's oil sector
balance of payments.
export revenues arc calculated
in gross terms, while company profits and production costs are treated as foreign
exchange expenditures.
Indonesia; Net ReceipPs from Oil E
xports
Millio
n US $
Gross oil exports
173
1,348
1974
4,690
Uil imports (c.i.f.)
-43
?200
Invisiblcs
?740
?2,296
Foreign oil com
pany profits
?428
-1,038
Foreign oil com
pany production costs
-170
-675
Pcrtamina produ
ction costs
?142
?583
Net oil exports (ne
receipts from the
t foreign exchange
oil scour)
565
2,194
Uil exports arc estimated on a payments basis, assuming an average lag of
three months from shipment. Thus they represent shipments during the first three
quarters of the year and the last quarter of the previous year. A further, more
irregular, lag can occur when Pertamina falls behind schedule in transferring its
tax payments to the central bank. This can cause discrepancies between Indonesia's
actual foreign exchange reserve position and Brie reserve position implied by the
current and capital accor~nts. For example, on 31 December 1974, Indonesia
reported 51.49? billion in official reserves, whereas kncwn data would have
suggested a figure closer to 51.8 billion. The "missing" funds are very difficult
to trace, but for accounting purposes are siwwn in the net errors and omissions
account of Indonesia's balancr of payments. Most of the problem is Pertamina's
occasional difficulty in meeting demands from foreign creditors on its incomr, any
the company has been using some of these funds to roll over short-term debts.
25X1
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APPENDIX B
NATIONAL ACCOUNTS DATA FOR 7974
Because output data on Indonesia are somewhat sparse and slow in appearing,
it was necessary to estimate national accounts for 1974 (see Table B-1). For most
sectors, this rec}uired only a relatively straightforward extrapolation of the output
series and other statistical indicators. In the case of petroleum, the increase in
Indonesia's share of earnings and the corresponding decline in the foreign
companies' share result in a much larger growth of the contribution to gross national
product, which excludes the earnings of the foreign companies, than to gross
domestic product, wluch includes these earnings.
Indonesia: GNP Growth by Sector
t. tanmatcd.
Overall Growth
GNP probably grew 8`/0-10`7c in real terms, slightly above the 1973 rate because:
? agriculture again performed well;
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? the mining ~?.ctor expanded at a record 30%, with unusual changes in
production-sharing; and
? other sectors and services expanded in response to higher oil and farm
output.
Sector shares were ;i,;rived from available production and national accounts
data; the methods used ~., estimate the growth rates of various components of
GNP are described below.
Agriculture
Agriculture grew an estimated 5%-6% as it did in 1973. Rice production was
up 5%-6`%, other food crops continued to recover from the drought and to make
gains under agricultural improvement prograrns, and timber output rose about 5?l0.
Mining
Driven by petroleum earnings, this sector grew 30%. About SIo of the growth
ret7ects increased oil output; the other 25%30`~c, contract revisions that allow more
of the oil prot'its to accrue to lndone~~~. Other mineral production also expanded
5~ ~ -6 /~.
Manufacturing
A growth rate of 87-10i~ in manufacturing was led by gains in the production
of fertilizer, assembled vehicles, and auto parts. A slowdown in textiles prevented
more rapid overall Nxpansion in the sector. Growth in import volume for the first
halt' of 1974 - 40'~ -suggests that Indonesian producers are not cnco~rntering
significant difficulties in gaining access to raw materials and capital equipment.
Sustained demand for new building, factories, and homes should have kept
the construction industry growing at ~0;~-25'ir as in 1973.
Transportation
Transportation probably abain grew in the 5`%-10`Ir range because of expanding
production of motor vehicles and increasing emphasis by the government on
improving local transportation systems.
sa
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Trade
Rapidly increasing imports and strong demand should have supported trade
growth of 10%-15 io.
Services are estimated to have grown 4?l0-5%, slightly more rapidly than
populatio~i, in support of growth in other sectors.
Tlus sector is estimated to have grown above trend at 10%-12% as its main
components, banking and public administration, ex~ anded in response to increased
financial activity and higher government salaries.
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Non-oil exports in 1974 climbed an estimated 35%, following an 85r/o rise
during the previous year. Most of the increase was caused by higher priers as
commodity markets remained relatively buoyant, but many products registered
volume increases also (see Tables C-1 and C-2).
Indonesia: Non-00 Exports
Percent of Total
1972 1973 1974[ Exports, 1974
Tot;~,l2 880 1,609 2,200 100
Timber 229 574 733 33
Rubber 190 392 500 23
Tin 70 93 1 G2 7
Copper 5 64 142 G
Palm oil 41 70 140 G
Coffee 77 78 108 5
Tea 31 26 41 2
Tobacco 30 40 34 2
Pepper 22 29 27 1
Copra cake 13 17 24 1
Bauxite 6 7 12 1
Palm kernels 4 5 10 Negl.
Copra 4 5
Other 158 209 267 (2
1. Estimated.
2. Because of rounding, components may not add to the totals shown.
In 1972, timber became Indonesia's second largest export; it retained the
position in 1974, as export earnings more than tripled the 1972 level. The boom
was colused by sharp price rises resulting from the revival of Japanese demand,
i!lcre~~sed US de-nand, and improved quality control. When demand tapered off
in the second half of 1974, prices fell, but not enough to offset gains earlier in
the year. Sttclt spectacular growth is not likely to continue throughout the decade,
as sharp demand increases wott(d be hard to sustain. In addition, the government
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Indoncxin: Non-0il Cxportel
tv7a
TIIOU6rllld
Metric Tont;2
PriCC rCf
Unit (US S)
Million US S
Total3
2,200
'fintbcr
18,800
39
733
Rubber
800
625
500
Tin
24
6,835
I G2
Copper
237
600
142
Palm oil
280
500
140
Coffcc
1 15
940
108
Tea
50
81G
41
Tobacco
34
1,000
34
Pcppcr
17
1,588
27
Copra cake
220
109
24
Bauxite
I ,200
10
12
Palm kernels
29
345
10
Other
N.A.
N.A.
267
1. I:stimatcd.
2. Unless otherwise noted.
3. Uccausc of rounding, components do not add to the total shown.
4. Thousand cubic meters.
already has plans to follow the lead of the Philippines and Malaysia in restricting
cuttings and promoting log processing. The market for processed lumber is a much
rnorc competitive one in which Indonesia, at least in the short run, will not have
an advantage.
After a long period of stagnation, rttLber exports revived in 1973. This was
caused mainly by the doubling of prices, although production expanded 15`%- as
it became profitable to tap older trees. The revival was slowed by falling prices
in the second half of 1974, but earnings still were up nearly 30'%- during the year.
Recent growth in production has come from smallholders, who produce 70`%~ of
Indonesian rubber. Through the rest of the: decade, estates will play a greater role
in growth as more attention has born given to their rehabilitation.
I"aim oil acrd kernels are produced only on estates, both government and
private. Production was up in 1973 as crops recovered from the 1972 drought
and acreages expanded in response to improved world markets. The value of palm
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oil exprtrts incrcnsed 70'Y., in 1973 and duuhlec! in 1974 as prices rcnxtined hlNh.
I'alnt kernel rxporls will continue to taper ol'I' because the kernels arr. being used
dontesticnlly in the new crushing mill that opened in Uctobrr 1973.
Cuffcc~, primarily Ilobusta, is grown on cstatcs and small farms. Production
has recovered from the drought of 1972 and increased slightly in 1973. Ilit;h prices
continued to boost export receipts in 1974, but the volurne of exports remains
constrained by the slow Etrowth in world denruul.
"I'ohuccu production and quality were adversely affected by drought in 1972
;utd heavy rains in 1973. Some improvement in 1973 was due to the cxrrutded
use of fertilizers, improved seed, and irrigation, combined with better weather.
Export volume was about the same as in 1973.
Pepper exports have stagnated in recent years because of lack of maintenance,
I'crtilir,cr, and credit and of vulnerability to disease. Export earnings in 1974
dropped slightly. Planned rehabilitation of the pepper industry should result in
export increases in keeping with world rnarkct growth of 2'I~ per year by the end
of the dea-dc. "
Production of 1c~a is expected to remain constant for the rest of the dccadc.
Three cstatcs arc being rehabilitated, but output on others will continue to decline.
Export earnings will depend on world prices, which rose at the end of 1973 and
remained relatively high to increase earnings by nearly GO`% in 1974.
Copra production has bccn hampered in rcccnt years by drought, pests, and
aging trees, but there was some recovery in 1974. Exports of copra have bccn
banned since October 1973 because shortages on the domestic market were causing
severe losses for processing mills and driving up the price of coconut oil. Copra
cake, on the other hand, will continue to be exported and take advantage of higher
prices.
The state 1i~r enterprise, currently the sole producer in Indonesia, is pursuing
a vigorous policy of expansion and rehabilitation. Production was up 5`%, in 1973
and another 10'% last year. Processing capacity is also being expanded, and by
the end of 1975 Indonesia may be exporting only tin metal. High prices and the
end of the International Tin Council quota system should continue to boost export
revenues, which were up an estimated 757- in 1974.
za
CONFIDENTIAL
Approved For Release 2005/01/10 :CIA-RDP86T00608R000500200011-4
 Approved For Release 2005~~~,+~Z~~1RDP86T00608R000500200011-4
I~rcepurt Indunrsia, Inc., begun exporting, topper cuncentratcs from Irian Juya
in Uctubcr 197?. '1'lie volume ul' exports in 1974 reuc;hcd 237,000 tuns, double
that of 1')73. Iligh prices, especially during the firs) hall' of the year, brought
an even t;rcatcr increase in rCVCnue4.
Ul/rrr nui~-u// rrpuNs, mainly corn, cassava, soybeans, livestock, and fish,
accounted I'or 12`Y~-IH'%,