REPORT FOR THE FINANCIAL YEAR 1986/87

BANKINDONESIA

BANK INDONNSIA

Head Office:

JAKARTA

Representatives:

KUALA LUMPUR,LONDON,NEW YORK,SINGAPORETOKYO.

Branch Offices:

AMBON, BALIKPAPAN, BANDA ACEH,BANDAR LAMPUNG, BANDUNG,BANJARMASIN, BENGKULU, CIREBON,DENPASAR, DILI, JAMBI, JAYAPURA, JEMBER,KEDIRI, KENDARI, KUPANG, LHOKSEUMAWE,MALANG, MATARAM, MEDAN, MENADO, PADANG,PADANG SIDEMPUAN, PALEMBANG, PALU, PEKANBARU,PEMATANG SIANTAR, PONTIANAK, PURWOKERTO, SAMARINDA,SAMPIT, SEMARANG, SIBOLGA, SOLO, SURABAYA,TASIKMALAYA, TEGAL, TERNATE, UJUNG PANDANG, YOGYAKARTA.

Position as per end of March 1987

ISSN 0376 - 4303

BANK INDONNSIA

Head Office:JAKARTA

Representatives:KUALA LUMPUR,

LONDON,NEW YORK,SINGAPORE

TOKYO.

Branch Offices:

AMBON, BALIKPAPAN, BANDA ACEH,BANDAR LAMPUNG, BANDUNG,

BANJARMASIN, BENGKULU, CIREBON,DENPASAR, DILI, JAMBI, JAYAPURA, JEMBER,

KEDIRI, KENDARI, KUPANG, LHOKSEUMAWE,MALANG, MATARAM, MEDAN, MENADO, PADANG,

PADANG SIDEMPUAN, PALEMBANG, PALU, PEKANBARU,PEMATANG SIANTAR, PONTIANAK, PURWOKERTO, SAMARINDA,

SAMPIT, SEMARANG, SIBOLGA, SOLO, SURABAYA,TASIKMALAYA, TEGAL, TERNATE, UJUNG PANDANG, YOGYAKARTA.

Position as per end of March 1987

ISSN 0376 - 4303ISSN 0376 - 4303ISSN 0376 - 4303ISSN 0376 - 4303ISSN 0376 - 4303

GOVERNMENT COMMISSIONER ANDGOVERNMENT COMMISSIONER ANDGOVERNMENT COMMISSIONER ANDGOVERNMENT COMMISSIONER ANDGOVERNMENT COMMISSIONER ANDBOARD OF MANAGING DIRECTORBOARD OF MANAGING DIRECTORBOARD OF MANAGING DIRECTORBOARD OF MANAGING DIRECTORBOARD OF MANAGING DIRECTOR

Dr. Arifin M. SiregarGovernor

A. J. Winoto S.Government Commissioner

Marjanto DanoesapoetroManaging Director

BinhadiManaging Director

Sujitno SiswowidagdoManaging Director

T. M. Sjakur MachmudManaging Director

R. RachadManaging Director

HendrobudiyantoManaging Director

Teuku Mohamad ZahirsjahManaging Director

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NONONONONOTES, SYMBOLS AND SOURCE OF DATES, SYMBOLS AND SOURCE OF DATES, SYMBOLS AND SOURCE OF DATES, SYMBOLS AND SOURCE OF DATES, SYMBOLS AND SOURCE OF DATTTTTAAAAA

r Revised figures

* Provisional figures

** Incomplete figures

(i.e. compiled from incomplete data)

... Data not yet available

-- Nil or less than the last digit

( ) Partial data

x Break in comparability before and after the symbol

$ United States dollar

Source of data: Bank Indonesia, unless mentioned otherwise.

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x

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A. Monetary PolicyA. Monetary PolicyA. Monetary PolicyA. Monetary PolicyA. Monetary Policy

In the reporting year, the Indonesianeconomy passed through a difficult periodas a consequence of severe pressures onthe balance of payments and sluggishdomestic demand. The pressures wereprimarily attributable to a sharp decline inoil prices and weak world economic growthcoupled with structural weaknesses in theIndonesian economy.

With regard to the balance of payments,these pressures were reflected in a largercurrent account deficit and a decrease inforeign exchange reserves. The drop in oilprices led to a sharp decline in governmentrevenues, which constrained theGovernment’s ability to provide funds forcurrent and development expenditures.Since government expenditures play asignificant role in stimulating economicactivity in the near term, a fall in governmentexpenditures tended to depress economicactivity.

To cushion the heavy pressures on thebalance of payments, while simultaneouslypromoting economic activity, an equitableincome distribution, and domestic pricestability, the authorities encountereddifficult choices in adapting monetary policyin the reporting year. An expansionarymonetary policy achieved through a reductionin interest rates would encourage economicactivity. However, this policy would also inducecapital outflows which in turn would worsenthe balance of payments. In addition, anexpansionary monetary policy would bring aboutprice increases, which would weaken thecompetitiveness of domestic products.

Facing this situation, the Governmentpursued a cautious monetary policy ofmaintaining the level of rates of interest onmonetary instruments, which declinedappreciably in preceding years. The policywas pursued in the fashion not only toencourage economic activity and fundmobilization, but also to support efforts toimprove the balance of payments position.However, in view of the unexpected drop inoil prices to below $ 10.00 per barrel inAugust 1986, the Government devalued therupiah by 31% against the US dollar onSeptember 12, 1986 in order to avoid afurther deterioration in the balance ofpayments. Furthermore, the Governmentundertook the October 25, 1986 and theJanuary 15, 1987 packages of deregulationmeasures to promote non-oil/gas exports asa follow up to the May 6, 1986 package. Toencourage capital inflows, the Governmentalso revoked the ceiling on swap facilitiesto Bank Indonesia.

On the basis of this monetary policy, thegrowth rates in domestic liquidity (M2

) andmoney supply (M

1) showed a decline in the

reporting year reflecting government effortsto improve the balance of payments bymaintaining domestic inflation at a relativelylow level.

B .B .B .B .B . Money Supply and FactorsMoney Supply and FactorsMoney Supply and FactorsMoney Supply and FactorsMoney Supply and FactorsAffecting Its ChangesAffecting Its ChangesAffecting Its ChangesAffecting Its ChangesAffecting Its Changes

In the reporting year, both domesticliquidity (M

2) and money supply (M

1)

recorded relatively low growth rates whilebank credits accelerated somewhat, therebysupporting economic growth. Despite asubstantial devaluation of the rupiah in the

I. MONETI. MONETI. MONETI. MONETI. MONETARARARARARY POLICY AND DEVELOPMENTSY POLICY AND DEVELOPMENTSY POLICY AND DEVELOPMENTSY POLICY AND DEVELOPMENTSY POLICY AND DEVELOPMENTS

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course of the reporting year, price inflationwas maintained at a relatively low level,reflecting the low growth rate of the moneysupply.

At the end of 1986/87, domestic liquidity(M

2) reached Rp 28,491 billion, having

increased by 17.9% compared with 24.3%in the preceding year (Table 1.1). Takinginto consideration the inflation rate,domestic liquidity in real terms rose by 8.0%compared with 17.5% in the preceding year.The slow growth in domestic liquidityoccurred in both the narrowly definedmoney supply (M

1) and quasi money.

Excluding revaluation effects of Rp 1,447billion of the quasi money due to theSeptember 12, 1986 devaluation, domesticliquidity increased by only 11.99%

At the end of 1986/87, M1 (comprising

currency in circulation and demanddeposits) amounted to Rp 11,500 billion,having increased by 9.8% as against 16.5%in the preceding year (Table 1.2). The lowergrowth in the money supply was mainlyaccounted for by a decline in the growth ofcurrency in circulation which increased by12.5% (to a level of Rp 5,673 billion)compared with 33.3% in the preceding year;demand deposits rose by 7.3% to Rp 5,827billion as against 4.4% in the precedingyear. These developments led to a declinein the share of demand deposits in moneysupply, from 51.8% to 50.7%. Meanwhile,money supply in real terms rose by only0.6% compared with 10.2% in thepreceding year (Table 1.3).

With regard to factors affecting thedevelopment of money supply, in thereporting year net foreign assets recorded asignificant expansionary effect (of Rp 2,344billion), mainly attributable to a revaluation

effect of Rp 6,079 billion resulting from theSeptember devaluation measure (Table 1.4.)The domestic sector also contributed anexpansionary effect due to a rapid increasein claims on entities, enterprises, andindividuals despite a significantcontractionary effect of the devaluationmeasure.

In the reporting year, government sectorcontributed to the money supply acontractionary effect of Rp 1,475 billion asagainst an expansionary impulse ofRp 1,142 billion in the preceding year. Thecontractionary effect in 1986/87 was mainlyattributable to a revaluation (amounting toRp 1,866 billion) of the governmentaccount, as a consequence of the changein the rupiah exchange rate.

Claims on entities, enterprises, andindividuals contributed an expansionaryeffect of Rp 5,567 billion to money supply,compared with Rp 3,834 billion in theprevious year. This expansionary effect wasdue to a rise in claims on official entitiesand public enterprises of Rp 640 billion,up from Rp 177 billion in the precedingyear. The increased claims were mainlyaccounted for by the increasing role of thebanking system in financing workingcapital and investments of official entitiesand public enterprises. Claims on privateenterprises and individuals also rose in thereporting year, by Rp 4,927 billion asagainst Rp 3,657 billion in the precedingyear. This increase in 1986/87 was due toan expansion of banking credits whichamounted to Rp 4,573 billion. Thisexpansion of banking credits was closelyassociated with a decline in lending ratesand a revaluation effect (Rp 354 billion)stemming from the rupiah exchange rateadjustments.

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Quasi money, which in the reporting yearhad a contractionary effect on moneysupply, increased by Rp 3,298 billioncompared with Rp 3,234 billion in thepreceding year. Excluding valuationadjustment of Rp 1,447 billion, quasimoney rose by only Rp 1,851 billion.

Net other items contributed acontractionary effect of Rp 2,113 billion,mainly on account of the revaluation ofRp 3,121 billion due to the rupiah exchangerate adjustment. It should be added that thissector had a contractionary effect ofRp 1,326 billion in the preceding year.

C. Monetary Prospect for 1987/88C. Monetary Prospect for 1987/88C. Monetary Prospect for 1987/88C. Monetary Prospect for 1987/88C. Monetary Prospect for 1987/88

A series of fundamental measures adoptedby the Government designed to encouragedomestic production and promote non-oil/gas exports are expected to have a favorableimpact on the growth of the Indonesianeconomy in 1987/88. In addition, thesignificant rise in oil prices since August1986 is expected to improve nationalincome and the balance of payments in1987/88. Moreover, a rise in the prices ofseveral major non-oil/gas commodities willcontribute further to an improvement in thebalance of payments.

Although world economic growth isprojected to decline a little in 1987, a seriesof policies to promote domestic efficiencyand non-oil/gas exports as well as the

improvement in oil prices since January1987 are expected to contribute to asignificant improvement in the balance ofpayments in 1987/88. In addition, theeconomic growth is expected to be moderate.However, since the trend of oil pricesremains uncertain, in 1987/88 monetarypolicy will be aimed at fostering monetarystability that will be conducive to animprovement in the balance of paymentswhile simultaneously raising economicgrowth, enhancing the equitability ofincome distribution, and maintainingreasonable price stability. Hence, themonetary policy in 1987/88 will continueto be directed toward maintaining a level ofinterest rates that is conducive to mobilizationof funds, encouragement of investments, andprevention of capital outflows.

With regard to the factors affecting moneysupply, in 1987/88 net foreign assets areexpected to have a greater expansionaryeffect on money supply owing to increasesin both oil/gas and non-oil/gas exports.Government finance in 1987/88 is alsoexpected to have an expansionary thrustsince an increase in government revenueswill in turn raise government expendituresby a significant amount. Meanwhile, due toa series of fundamental measures aimed atenhancing production and investment,demand for bank credits is expected toincrease, bringing about a significantexpansionary effect on the main measuresof money supply in 1987/88.

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MONEY SUPPLMONEY SUPPLMONEY SUPPLMONEY SUPPLMONEY SUPPLY AND DOMESTIC LIQUIDITYY AND DOMESTIC LIQUIDITYY AND DOMESTIC LIQUIDITYY AND DOMESTIC LIQUIDITYY AND DOMESTIC LIQUIDITY

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FFFFFACTORS EFFECTING MONEY SUPPYACTORS EFFECTING MONEY SUPPYACTORS EFFECTING MONEY SUPPYACTORS EFFECTING MONEY SUPPYACTORS EFFECTING MONEY SUPPY

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A. Credit PolicyA. Credit PolicyA. Credit PolicyA. Credit PolicyA. Credit Policy

In order to alleviate the adverse impactof sluggish domestic economy, in 1986/87the Government undertook policiesdesigned to encourage banks to managetheir liquidity more efficiently so as toexpand their capability to extend loans. Inaddition, efforts to promote businessactivities of the economically-weak groupcontinued to be implemented by improvingprocedures in channeling credits andunifying the terms of credits. In line withthe aforementioned policies, which remainedconsistent with the June 1, 1983 MonetaryReform, credit extension was aimed atenhancing investment activities to promotelabor intensive industries and non-oil/gasexport commodities as well as developingthe business activities of the economically-weak group.

To enhance the capabilities of banks inmanaging their funds and in assisting theirprime customers, in March 1987 BankIndonesia relaxed the overdraft facility witheffect from April 1987.1) The overdraft facilityextended to debtors was raised from 5% to15% of the maximum credit, whereas theoverdraft facility to depositors was raised from10% to 15% of the effective balance at thetime the overdraft occurred. The duration ofoverdraft, initially fixed for seven days, wasextended to 15 days, while the interest rate tobe charged was left to each bank’s discretion.

To assist Bank Rakyat Indonesia inmanaging its funds, in the reporting year Bank

Indonesia provided special liquidity credit inthe form of a prepayment of governmentsubsidy in regard to, among others, thefertilizer and pesticide financing.

To promote non-oil/gas exports, in October1986 Bank Indonesia reduced theself-financing requirement of export creditsfor companies under the foreign directinvestment scheme (Penanaman Modal Asingor PMA) from 30% to 15% of total outlays.2)

In addition, to promote the competitivenessof national contractors entering internationaltenders, Bank Indonesia lowered thecommitment fee on working capital credits.The size of the commitment fee, initially leftto each bank’s discretion, has been fixed at amaximum of 0.5% of the maximum creditsince May 1986.3)

To attract investment and encourage theholding of national equity in PMA companies,since June 1986 state commercial banks andthe state development bank (BankPembangunan Indonesia or Bapindo) haveprovided working capital credits to certainPMA companies. Three types of PMAcompanies are eligible for this credit : thosein which 75% of their equity is owned by stateor national private entities, those in which atleast 51% of their equity is issued throughthe capital market, and those in which at least51% of their equity is owned by state and/ornational private entities and which have offered20% of its shares through the capital market.4)

II. BANK CREDITII. BANK CREDITII. BANK CREDITII. BANK CREDITII. BANK CREDIT

2) Bank Indonesia Circular Letter No. 19/6/UKU, October25, 1986.

3) Bank Indonesia Circular Letter No. 19/2/UKU, May27, 1986.

4) Bank Indonesia Circular Letter No. 19/4/UKU, June 4,1986.

1) Bank Indonesia Circular Letter No. 19/3/BPPP, March12, 1987.

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In June 1986, the Government stipulateda regulation on investment credit designedto develop plantation estates under thesmallholders’ plantation nucleus estatescheme (Perusahaan Inti Rakyat or PIR)incorporated in the transmigration program(PIR Trans). This regulation was intendedto increase output of plantation crops, raisefarmers’ income, and support thetransmigration program. The investmentcredit is provided by national commercialbanks of which financing is fixed at 35% ofthe total project cost. The lending rate toplantation estates is fixed at 16%, whereasthat to farmers will be adjusted downwardin accordance with the lending rate chargedto the economically-weak group. Thematurity of nucleus plantation credit isbetween 13 and 20 years including a graceperiod of 4-7 years; participant farmersreceive between 9 and 13 years without agrace period. Bank Indonesia provides 55%of the credit in the form of liquidity creditwith an interest rate of 6.5%.5) In addition,since January 1987 credit extended toprivate plantation estates has beenexpanded not only to finance existingplantations under the former system ofcommercial use right (Hak Guna Usaha orHGU), but also for the expansion of plotssurrounding the estates. Under the newHGU, activities eligible for financing under,credit for private national plantation estates(Perkebunan Swasta Nasional or PSN)include intensification, rehabilitation,rejuvenation, and expansion of plantationsso as to achieve economies of scale eitherin old plots or new estates.6)

To encourage the provision of credit tobusiness activities of the economically-weakgroup (in particular as regards investmentcredit, working capital credit up to Rp 75million, and working capital credit underKeppres No. 29/1984), since November1986 Bank Indonesia has adjusted theprovision of liquidity credits based on theoutstanding credit of customers. Formerly,the provision of these liquidity credits wasbased on a total maximum amount availableon a fiscal year basis. Particularly forworking capital credit under Keppres No.29/1984, handling banks are now allowedto extend credit without prior approval ofthe liquidity credit as long as the lendingrate of this credit is equal to the interestrate fixed by Bank Indonesia. In addition,the liquidity credit may be applied pursuantto the letter of work order (Surat PerintahKerja or SPK) or other identification lettersregarding project implementation.7)

Furthermore, to develop smallscaleenterprises, the Government continued toassist banks in selecting potential projectsfor implementation and in improving theirtechnical skills in analyzing, projects as wellas in providing concessionary credits.

B. Credit DevelopmentsB. Credit DevelopmentsB. Credit DevelopmentsB. Credit DevelopmentsB. Credit Developments

At the end of the reporting year, bankendings amounted to Rp 27,852 billion,having increased by 24.2% compared with16.0% in the preceding year (Table 2.1).This increase was the highest since the June1, 1983 Monetary Reform.

By group of banks, credits extended bydeposit money banks (DMBs) rose by 24.5%

5) Bank Indonesia Circular Letter No. 19/3/UKU, June 4,1986.

6) Bank Indonesia Circular Letter No. 20/2/UKU, April 7,1987.

7) — Bank Indonesia Circular Lener No. 19/1/UKK,April 16, 1986.

— Bank Indonesia Circular Letter No. 19/2/UKK,November 4, 1986.

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to Rp 26,679 billion (Table 2.4). At the endof March 1987, credits extended by statebanks increased by 24.0% to Rp 18,902billion, while those extended by privatenational commercial banks (Bank UmumSwasta Nasional or BUSNs) rose by 28.6%to Rp 5,772 billion. Credits extended byregional development banks (BankPembangunan Daerah or BPDs) increasedby 24.2% to Rp 786 billion, while thoseextended by foreign banks increased by13.7% to Rp 1,219 billion.

It is worth noting that direct credits ofBank Indonesia, mostly extended to statesavings bank (Bank Tabungan Negara orBTN), rose by 17.5% to Rp 1,173 billion.This increase was mainly intended toencourage the extension of house-ownershipcredit (Kredit Pemilikan Rumah or KPR) inthe effort to support low-cost housingconstruction.

In 1986/87, bank credits to all economicsectors recorded an increase (Table 2.1).Credits to the manufacturing sector - mainlyfor chemical and plastic products, textiles,paper, and wood and its products - roserapidly by 24.5% (Rp 1,871 billion).Credits to the trade sector increased by18.8% (Rp 1 ,344 bi l l ion), mainly tofinance retail trade, purchase and collectionof domes t ica l ly t raded goods , andexports of finished and semi-finishedgoods. Credits to the services sectorrose by 12.5% (Rp 490 billion), mainly tofinance low-cost housing construction,services business, electricity, and publictransportation. Credits to the agriculturalsector went up by 20.4% (Rp 372 billion),mainly to finance rubber, oil palm,sugarcane, and tobacco plantations; creditsto the mining sector rose by 52.7% (Rp 136billion), mainly for oil, earth gas, and coal

mines. Based on these developments, theshare of credits to manufacturing remainedat about 34.1%, while those to agricultural,trade, and services sectors declined to7.9%, 30.5%, and 15.8%, respectively.

Based on uses, working capital creditsincreased by 24.6% to Rp 19,927 billionin the reporting year as against 17.6% in1985/86. Working capital credits weremostly extended to trade (40.6%),manufacturing (31.4%), and services sectors(14.5%). Investment credits, which consistof commercial bank credits, small-scaleinvestment credits (Kredit Investasi Kecilor KIK), and other investment credits,amounted to Rp 7,925 billion at the end ofthe reporting year, having increased by23.2% as against 12.2% in the precedingyear. The higher increase in investmentcredits was mainly due to an increase incredits to agricultural sector, especiallyplantation crops, textile industry subsector,and electricity. As regards the distributionof credits, the share of investment creditsin the agricultural and manufacturingsectors increased to 17.0% and 41.0%,respectively, whereas that of the servicessector declined to 19.2% (Table 2.2).

By scale of priority, high priority credits,such as, KlKs, KMKPs, cooperative credits,Kupedes, and export credits, rose by 7.7%to Rp 6,238 billion, whereas non-prioritycredits increased by 30.7% to Rp 20,441billion (Table 2.4). Taking account of otherpriority credits, such as KPR and credit forsmallholders, the total priority creditsincreased by 10.1% to Rp 8,003 billion.

Priority working capital credits rose by2.8% reaching Rp 4,729 billion and priorityinvestment credits rose by 26.6% reachingRp 1,509 billion. Non-priority working

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capital and non-priority investment creditsrose by 32.6% to Rp 14,882 billion and25.8% to Rp 5,559 billion, respectively. Itis noteworthy that the priority creditsextended by BUSNs increased rapidly(43.3%) reaching Rp 394 billion which wasprimarily due to a rise in export credits. Inaddition, foreign banks, which have beenallowed to extend priority credits for exportssince September 1985, recordedoutstanding credits of Rp 70 billion at theend of March 1987 as against Rp 19 billionin 1985/86.

Outstanding KlKs showed a decline of4.6% to Rp 311 billion compared with adecline of 8.4% in the preceding year. Thevalue of approved applications rose by11.5% to Rp 1,175 billion and the numberof customers increased by 6.6% to 290thousand at the end of the reporting year.

Outstanding KMKPs registered a declineof 1.2% to Rp 878 billion as against adecline of 4.5% in the preceding year. Thevalue of approved applications rose by19.6% reaching Rp 3,431 billion, while thenumber of customers increased by 7.8% to

2,214 thousand at the end of the reportingyear (Table 2.3).

In addition to the priority credits extendedby DMBs, there are also priority creditschanneled through BTN known as KPR. Itshould be noted that the sources of fundsto finance the KPR are obtained from BankIndonesia refinancing facilities, selffinancing, and the government budget. Atthe end of 1986/87, the KPRs extended byBTN recorded an increase of 16.3%reaching Rp 1,391 billion and the numberof customers increased by 9.0% to 363thousand.

Finally, there are also credits channeledoutside the banking sector, namely smallcredits for petty traders (Kredit CandakKulak or KCK) and the KPR for themiddle-income group which is channeledthrough PT Papan Sejahtera. The KCKs,which are intended to assist small tradersand the low-income group, reached Rp 13billion at the end of the reporting year. Theoutstanding KPRs channeled through PTPapan Sejahtera went up by 65.9% reachingRp 68 billion with 4,673 customers.

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A. Policy on Mobilization of FundsA. Policy on Mobilization of FundsA. Policy on Mobilization of FundsA. Policy on Mobilization of FundsA. Policy on Mobilization of Funds

In response to the sharp decrease ingovernment revenues from oil/gas, themobilization of funds from private domesticsources has become more important insupporting production and investment. In thereporting year, the Government continued tomobilize domestic funds by promotingfinancial institutions and by encouraging thedevelopment of money and capital markets.In this respect, the Government continued toimplement policies undertaken in precedingyears, such as: suspending the collection oftaxes on income (Pajak Penghasilan or PPh)earned from time and savings deposits;promoting the development of financialinstitutions; and designating banks to handleTabanas and Taska and issue certificate ofdeposits (CDs).

As part of the Bank Indonesia’s policy topromote sound banking operations, banks arerequired to consider carefully their needs andcapacity to repay when they utilize interbankcall money to meet daily liquidity requirement.For this purpose, as in the preceding year,Bank Indonesia set the maximum amount ofinterbank call money that an individual bankcould borrow. In addition, Bank Indonesiacontinued to stabilize interest rates oninterbank call money by influencingtransactions and discount rates of indirectmonetary instruments, namely Bank Indonesiacertificates (Sertifikat Bank Indonesia or SBIs),money market securities (Surat BerhargaPasar Uang or SBPUs), and discount facilities.

To encourage development of the moneymarket, in 1986/87 Bank Indonesia continuedto expedite and promote the trading ofcommercial paper in the money market by

broadening the available denominations ofSBPUs and by improving the tradingprocedures for SBIs.

Previously, the available range ofdenominations of SBPUs was between aminimum of Rp 25 million and a maximumof Rp 1 billion for all transactions. SinceAugust 1986, however, issuers of SBPUs havebeen granted a facility to issue SBPUs with amaximum denomination of Rp 5 billion fortransactions above Rp 5 billion.1)

To encourage the SBI secondary market,Bank Indonesia improved the tradingprocedures for SBIs by changing theissuance frequency and by regulatingrediscount transactions. The issuance ofSBls, which had been conducted on a dailybasis since July 1985, has been carried outweekly since August 6,1986. In addition,banks and non-bank financial institutions(NBFIs) are only allowed to discount at theprevailing market discount rate those SBIs thathave a remaining maturity of 21 days or less tothe securities house which can further rediscountthose SBIs to Bank Indonesia. SBIs with aremaining maturity in excess of 21 days can onlybe discounted to the securities house at theprevailing market discount rate. Nevertheless,Bank Indonesia can also repurchase SBIs withremaining maturity exceeding 21 days at adiscount rate determined by Bank Indonesia. Itis worth noting that SBI trading can also becarried out in the Jakarta clearing house.2)

As was the case in the preceding year,the Government continued to encourage the

III. MOBILIZAIII. MOBILIZAIII. MOBILIZAIII. MOBILIZAIII. MOBILIZATION OF FUNDSTION OF FUNDSTION OF FUNDSTION OF FUNDSTION OF FUNDS

1) Bank Indonesia Circular Letter No. 19/3/UPG, August6, 1986.

2) Bank Indonesia Circular Letter No 19/4/UPG, August6, 1986.

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development of capital markets. In thisregard, as explained in Chapter II, in thereporting year the Government undertookefforts to encourage state commercial banksto provide working capital credit to foreigncompanies that had issued or had offeredtheir securities through the capital market.3)

B. Banks’ Funds DevelopmentsB. Banks’ Funds DevelopmentsB. Banks’ Funds DevelopmentsB. Banks’ Funds DevelopmentsB. Banks’ Funds Developments

In the reporting year, mobilization offunds from the public through the bankingsystem showed favorable progress. Fundsmobilized by banks in rupiah and foreignexchange rose by 15.4% reachingRp 24,060 billion (Table 3.1). This amountcomprised Rp 7,562 billion of demanddeposits, Rp 14,912 billion of time deposits,and Rp 1,586 billion of savings depositseach of which increased significantly.

The increase in time and savings depositsmainly stemmed from the attractive interestrates on rupiah time and savings depositsas well as from the continued suspension ofthe collection of tax on income earned fromthose deposits.

The share of demand deposits declinedfrom 33.8% at the end of March 1986 to31.4% at the end of March 1987, whereasthe share of time deposits increased from60.4% to 62.0%. In the same period, theshare of savings deposits rose from 5.8% to 6.6%.

1. Demand deposits1. Demand deposits1. Demand deposits1. Demand deposits1. Demand deposits

In 1986/87, the amount of demanddeposits in rupiah and foreign currenciesincreased by 7.4% to Rp 7,562 billion. Thisincrease occurred mainly in the rupiahvalue of foreign currency demand deposits

(46.6%) due to the September 12, 1986rupiah devaluation.

1.1 Rupiah demand deposits1.1 Rupiah demand deposits1.1 Rupiah demand deposits1.1 Rupiah demand deposits1.1 Rupiah demand deposits

Rupiah demand deposits mobilized bybanks in the reporting year increased by1.3% to Rp 6,162 billion compared with8.7% in the preceding year. This increasetook place in the private national banks andforeign banks, namely 30.3% and 24.3%,respectively, while state banks recorded adecline of 5.6%.

1.2 1.2 1.2 1.2 1.2 Fore ign cur rency demandFore ign cur rency demandFore ign cur rency demandFore ign cur rency demandFore ign cur rency demanddeposi tsdeposi tsdeposi tsdeposi tsdeposi ts

In the reporting year, foreign currencydemand deposits increased by 46.6% toRp 1,400 billion compared with 39.8% inthe preceding year. This increase occurredin all foreign exchange banks - state banksby 42.9%, private national banks by84.0%, and foreign banks by 46.0%.

2. T2. T2. T2. T2. Time depositsime depositsime depositsime depositsime deposits

In the reporting year, the amount of timedeposits in rupiah and foreign currenciesincreased by 18.5% to Rp 14,912 billion. Thisincrease was due to a rise in rupiah timedeposits that was partly offset by a decline inthe foreign currency time deposits.

2.1. Rupiah time deposits2.1. Rupiah time deposits2.1. Rupiah time deposits2.1. Rupiah time deposits2.1. Rupiah time deposits

The amount of rupiah time deposits in1986/87 rose by 26.0% to Rp 11,448billion compared with 38.9% in thepreceding year. This rise was attributableto increases in time deposits mobilized bystate banks, private national banks, andregional development banks which rose by29.4% to Rp 7,207 billion, 26.3% toRp 3,462 billion, and 35.9% to Rp 178

3) Bank Indonesia Circular Letter No. 19/4/UKU, June 4,1986.

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billion, respectively; funds mobilized byforeign banks declined by 7.4% (Table 3.2).

In terms of maturity, a large increaseoccurred in 12-month time deposits. It isnoteworthy that this large increase raisedthe share of 12-month time deposits to therelatively high level of 50.5% of all rupiahtime deposits; their share stood at 47.5%in the preceding year (Table 3.3).

Interest rates on time deposits generallydeclined slightly. The interest rates offered bystate banks in the reporting year remainedunchanged, ranging from 13.0% to 15.0% p.a.The range in private national banks rosesomewhat to 13.0% to 17.5% compared with12.5% to 19.0% p.a. in the preceding year;the range offered by foreign banks widenedto 9.5% to 18.0% as against 13.0% to 16.5%p.a. in the preceding year (Table 3.4).

2.2. 2.2. 2.2. 2.2. 2.2. Foreign currency time depositsForeign currency time depositsForeign currency time depositsForeign currency time depositsForeign currency time deposits

In the reporting year, the rupiah value offoreign currency time deposits declined by1.0% to Rp 3,464 billion. This decline tookplace in foreign banks and private nationalbanks by 0.5% and 5.5%, respectively. Interms of maturity, one-month time depositsrecorded a decline of 12.7%, however, itsshare remained relatively high, namely 53.4%of the total foreign currency time deposits.

3. Savings deposits3. Savings deposits3. Savings deposits3. Savings deposits3. Savings deposits

Private savings, consisting of savingsunder the National Development SavingsScheme (Tabungan Pembangunan Nasionalor Tabanas), the Time Insurance SavingsScheme (Tabungan Asuransi Berjangka orTaska), the Haj Pilgrimage ExpensesSavings Scheme (Tabungan Ongkos Naik

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Haji or ONH), the Rural Savings Scheme(Simpanan Pedesaan or Simpedes), andother types of savings, in the reporting yearcontinued to show favorable progress. Thisprogress was reflected in a rise in theamount of savings and number of savingsaccounts, by 30.9% and 3.2% to Rp 1,586billion and 17,964 thousand accounts,respectively.

3.1. T3.1. T3.1. T3.1. T3.1. Tabanas and Tabanas and Tabanas and Tabanas and Tabanas and Taskaaskaaskaaskaaska

In the reporting year, the amount of Tabanasmobilized by handling banks increased by21.4% to Rp 1,286 billion. The number ofTabanas accounts rose by 11.3% to 16,729thousand accounts at the end of March 1987.This increase was closely associated withcontinued government efforts to increase thenumber of handling banks and to intensifymobilization, especially among youths,students, and scouts. Meanwhile, the amountof Taska increased by 2.5% to Rp 646 million,whereas the number of Taska accountsdeclined by 11.7% to 16 thousand accounts(Table 3.5).

In the reporting year, the number of bankshandling Tabanas and Taska increased by3; there were another 2 private nationalbanks and 1 more regional developmentbank. At the end of March, 1987 the totalhandling banks stood at 68, comprising 6state commercial banks, 42 private nationalbanks, and 20 regional development banks.

3.2.3.2.3.2.3.2.3.2. Ongkos Naik Haj i o r ONH Ongkos Naik Haj i o r ONH Ongkos Naik Haj i o r ONH Ongkos Naik Haj i o r ONH Ongkos Naik Haj i o r ONHsavings depositssavings depositssavings depositssavings depositssavings deposits

The ONH savings deposit is a temporarysavings account owned by prospective hajpilgrims used to finance the cost of the hajpilgrimage. As in the preceding year, theamount of ONH required for eachprospective haj pilgrim was Rp 3,212

thousand.4) The amount of ONH mobilizedduring the reporting year increased by 47.3%to Rp 167.5 billion with 52,154 prospectivehaj pilgrims compared with 35,401 in thepreceding year.

C. Money Market DevelopmentsC. Money Market DevelopmentsC. Money Market DevelopmentsC. Money Market DevelopmentsC. Money Market Developments

1. Interbank call money1. Interbank call money1. Interbank call money1. Interbank call money1. Interbank call money

In the reporting year, the amount oftransaction in the Jakarta interbank callmoney market declined by 2.8% to Rp 8,150billion (Table 3.6). This decrease was closelyassociated with increasing transactions inmoney market securities, i.e., SBIs andSBPUs, and the availability of discountfacilities from Bank Indonesia to overcometemporary mismatches of bank liquidities. Inaddition, the money market interest rateincreased from 10.53% to 13.73%.

2. Certificate of Deposits (CDs)2. Certificate of Deposits (CDs)2. Certificate of Deposits (CDs)2. Certificate of Deposits (CDs)2. Certificate of Deposits (CDs)

At the end of March 1987, the amount ofCDs issued by banks declined by 50.6% toRp 120 billion. These lower CDs mainlyoccurred in the state commercial banksamounted to Rp 98 billion (Table 3.7). It isnoteworthy that in the reporting year thenumber of banks authorized to issue CDsincreased by 4, bringing about the totalnumber of banks acting as issuers to 26,comprising 5 state commercial banks, 11foreign banks, and 10 private nationalcommercial banks.

3. Money market securities (Surat3. Money market securities (Surat3. Money market securities (Surat3. Money market securities (Surat3. Money market securities (SuratBerharga Pasar Uang or SBPU)Berharga Pasar Uang or SBPU)Berharga Pasar Uang or SBPU)Berharga Pasar Uang or SBPU)Berharga Pasar Uang or SBPU)

Trading of SBPUs made a satisfactoryprogress during the reporting year. The

4) Presidential Decree No. 6/1986, February 6, 1986.

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purchase and sale of SBPUs by the securitieshouse increased to Rp 33,170 billion andRp 23,069 billion, respectively, comparedwith Rp 6,198 billion and Rp 1,305 billionin the preceding year. In the same period,matured SBPUs amounted to Rp 9,791 billion.Taking into account outstanding SBPUs in theamount of Rp 656 billion at the beginning ofthe reporting year, SBPUs held by thesecurities house at the end of March 1987amounted to Rp 966 billion (Table 3.11). Atthe end of March 1987, the number ofbanks/NBFIs trading SBPUs through thesecurities house was 69.

4. Bank Indonesia certificate4. Bank Indonesia certificate4. Bank Indonesia certificate4. Bank Indonesia certificate4. Bank Indonesia certificate(Sertifikat Bank Indonesia or SBI)(Sertifikat Bank Indonesia or SBI)(Sertifikat Bank Indonesia or SBI)(Sertifikat Bank Indonesia or SBI)(Sertifikat Bank Indonesia or SBI)

In the reporting year, issuance of SBIs ingross terms amounted to Rp 7,141 billion,having increased by 15.4% (Table 3.9).Taking into account matured SBIs, theoutstanding SBIs at the end of March 1987amounted to Rp 161 billion. Of this amount,Rp 117 billion was held by banks/NBFIsand the remainder by the securities house.By group of buyers, state banks were by farthe major buyers (93.3%) of SBls. In thereporting year, SBIs discount rates for the

30-day and 90-day maturity remainedunchanged, namely 14% and 15% p.a.,respectively (Table 3.10).

5. Non-bank Financial Institution5. Non-bank Financial Institution5. Non-bank Financial Institution5. Non-bank Financial Institution5. Non-bank Financial Institution(NBFI) papers(NBFI) papers(NBFI) papers(NBFI) papers(NBFI) papers

Funds mobilized through the issuance ofmoney market paper by NBFls, especiallyin the form of promissory notes, registereda decline of 1.3% to Rp 986 billion. Thisdecline was mainly attributable to lowerbusiness investments in NBFI paper.

D. Capital MarketD. Capital MarketD. Capital MarketD. Capital MarketD. Capital Market

Long-term funds mobilized through thecapital market (which was reactivated inAugust 1977) recorded an increase in thereporting year. Stocks and bonds issuedamounted to 739.7 thousand stocks and 3.7thousand bonds with a value of Rp 1.2billion and Rp 50 billion, respectively. Atthe end of March 1987, outstanding stocksand bonds issued amounted to Rp 133.1billion and Rp 404.7 billion, respectively(Table II). The number of business entitiesissuing stocks and bonds to the publicthrough the capital market remained

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unchanged at 27, consisting of 24companies issuing stocks and 3 companiesissuing bonds.

Stocks and bonds exchanged in thesecondary market during the reporting yearamounted to 1,567.5 thousand stocksvalued at Rp 2.3 billion and 17.7 thousandbonds valued at Rp 11.3 billion.

In the reporting year, PT Danareksa issued

2,500 thousand fund certificates valued atRp 25.0 billion. Up to the end of thereporting year, PT Danareksa had issued 7types of fund certificates totaling 14.0million certificates valued at Rp 140 billionand 3 types of share certificates totaling 1.4million certificates worth Rp 12.8 billion.The total number of share certificates andfund certificates in circulation at the endof the reporting year was 14.2 million at avalue of Rp 140.6 billion.

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A. BankingA. BankingA. BankingA. BankingA. Banking

1. Policy on banking supervision1. Policy on banking supervision1. Policy on banking supervision1. Policy on banking supervision1. Policy on banking supervision

In 1986/87 the policy on bankingsupervision continued to be directed towardfostering a sound and efficient bankingsystem in order to enhance its role insupporting economic development. Thesteps undertaken during the reporting yearwere intended to achieve higher efficiencyand professionalism in the banking sectorso as to enable banks to operate soundly,thereby maintaining public confidence onthe banking system. For this purpose, theformula for capital adequacy has beenrevised and banks have been permitted toaccept joint accounts. In addition, effortspreviously undertaken, such as, theprovision of technical assistance to regionaldevelopment banks, the expansion of localclearing activities, and the encouragementof merger among private national banks,continued to be implemented.

In assessing the soundness of a bank,one of the factors taken into account issolvency, the calculation of which is basedon a capital adequacy formula introducedin 1977. In order to encourage thedevelopment of banking and to support asound banking system, Bank Indonesiarevised the formula in this reporting year.This revision was intended to ease thecapital requirement of a soundly-operating bank and to reduce thetendency to extend large loans to eitheran individual customer or corporation. Itshould be added that this regulation isonly applied to private national andregional development banks.

For these purposes, loans under the newformula are classified into three categories:loans covered by credit insurance; loansuncovered by credit insurance of which theoutstanding amount per customer is up to15% of the bank’s net worth; and, loansuncovered by credit insurance of which theoutstanding amount per customer is inexcess of 15% of the bank’s net worth.Assessment on the risk of these loans is stillbased on four categories: performing;substandard; doubtful; and bad debt. Thecapital adequacy for the first categoryranges from 0.5% to 25%, the second from2.5% to 100%, and the third from 20% to100%.l) In assessing capital adequacy, riskassociated with other items, such as, equityand miscellaneous assets, are also included.Under the previous formula, such a loancategory was not taken into account andcapital adequacy was fixed between 2.5%and 100%.

Along with the development of thebusiness sector and with efforts to improveservices to the public, since April 1986banks have been permitted to accept jointaccounts from several institutions,individuals and a combination ofinstitutions and individuals.2) Other effortsto enhance banking services includeexpanding local clearing activities in regionswhere there is no Bank Indonesia’s branchoffice, and improving local clearingactivities in Jakarta. Previously, thepresentment, return, and settlement of

IVIVIVIVIV. BANKING AND OTHER FINANCIAL INSTITUTION. BANKING AND OTHER FINANCIAL INSTITUTION. BANKING AND OTHER FINANCIAL INSTITUTION. BANKING AND OTHER FINANCIAL INSTITUTION. BANKING AND OTHER FINANCIAL INSTITUTION

1) Bank Indonesia Circular Letter No. 19/6/UPPB, May27, 1986

2) Bank Indonesia Circular Letter No. 19/1/UPPB, April23, 1986.

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clearing documents were conducted in thesame day; under the new regulation, thepresentment of clearing documents isconducted in the afternoon, whereas thereturn and settlement of clearing documentsare carried out the following morning. Thisimprovement is intended to provide moretime for banks to examine and complete theclearing documents due to an increasedvolume of clearing documents. However, inorder to avoid prejudicing the interest ofcustomers, the transaction date is recordedon the same date as when the clearingdocument is submitted for clearing.3)

2. Banking developments2. Banking developments2. Banking developments2. Banking developments2. Banking developments

As a result of the merger of 4 privatenational commercial banks into 1 bank andthe establishment of 1 private savings bank,the number of banks, comprisingcommercial, development, and savingsbanks, at the end of March 1987 decreasedby 2 to 113 banks. The number of offices,consisting of head, branch, and sub-branchoffices increased by 92 to 1,561 offices(Table 4.1).

With the merger of the 4 private nationalcommercial banks, the number ofcommercial banks during 1986/87decreased by 3 to 81 banks, comprising 5state commercial banks, 65 private nationalcommercial banks, and 11 foreign banks.Meanwhile, the number of commercial bankoffices, consisting of head, branch, andsub-branch offices, increased from 1,216to 1,265 offices. This increase occurred instate commercial banks and private nationalcommercial banks. The number of statecommercial banks rose by 20 branch

offices, including the promotion of 4sub-branch to become branch offices andthe number of private national commercialbanks rose by 33 branch offices.Consequently, at the end of 1986/87 therewere 780 state commercial bank offices, 464private national commercial bank offices,and 21 foreign bank offices.4)

The number of development banksremained unchanged at 29, consisting of 1state development bank, 27 regionaldevelopment banks, and 1 privatedevelopment bank. With the opening of 13offices, regional development bank officestotaled 253 at the end of 1986/87.

At the end of the reporting year, thenumber of savings banks was 3, consistingof 1 state savings bank and 2 private savingsbanks. With an addition of 3 branch officesof state savings bank and 27 branch officesof private savings bank, the number ofsavings bank offices added up to 43.

In the repoting year, the number of ruralcredit banks, comprising village banks,paddy banks, petty traders banks and em-ployees banks, decreased from 5,820 to5,789. This reduction was a consequenceof the revocation of the operation permits of16 village banks and 15 paddy banks.

The activities of deposit money bankscontinued to show favorable developments.In the reporting year, the amount of assetsrose by 18.8% to Rp 41,441 billion, theextension of loans by 25.5% to Rp 27,085billion, and the mobilization of funds by19.6% to Rp 27,430 billion (Table 4.2).

3) Bank Indonesia Circular Letter No. 19/27/UPG, March10, 1987.

4) Besides those foreign bank branches, there were also67 foreign bank representative offices.

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Based on assets, the share of privatenational banks increased, whereas that of othergroups decreased. With respect to loans, theshare of private national banks rose, regionaldevelopment and state banks remainedunchanged, whereas that of foreign banksdeclined. With regard to the fund mobilization,the share of state banks and private nationalbanks increased, whereas those of othergroups decreased (Table 4.3).

As an indication of the effective use of bankfunds, the ratio of excess reserve went downfrom 1.3% in 1985/86 to 0.5% in the report-ing year (Table 4.4). This decrease occurredin state banks, private national commercialbanks, and regional development banks.

As in the previous years, during thereporting year efforts to promote regionaldevelopment banks were continued,especially in the form of technicalassistance, i.e., improving the operationalmanuals of each bank. The manualsinclude, among others, guidelines inorganization, management, personnel, fundmobilization, and credits.

Efforts to expand and expedite transactionsin demand deposits and to extend services tothe public were continued, especially in aregion where there is no Bank Indonesiaoffice. During the reporting year, 4 branchoffices of state banks were designated tohandle local clearing activities, bringing thetotal local clearings to 33.

In connection with the implementation ofthe Presidential Decree No. 29/1984regarding the execution of constructionprojects and procurement of materialsfinanced by the state budget, in 1986/87banks and financial institutions complyingwith certain requirements were permitted toissue bank guarantees in order to expeditethe implementation of those projects. In thisregard, 87 banks had been appointed to issuebank guarantees, consisting of 5 statecommercial banks, 1 state development bank,57 national private commercial banks, 23regional development banks, and 1 privatedevelopment bank.5)

5) Minister of Finance Decree No. 105/KMK.011/1986,February 24, 1986.

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B. Other Financial InstitutionsB. Other Financial InstitutionsB. Other Financial InstitutionsB. Other Financial InstitutionsB. Other Financial Institutions

In the reporting year, efforts to promotethe activities of other financial institutions,which include non-bank financialinstitutions, insurance companies, leasingcompanies, and pawnshops, continued tobe implemented. These efforts were directedat enabling those institutions to operatesoundly and at enhancing mutual supportamong them as well as between them andthe banking system.

1. Non-bank financial institutions1. Non-bank financial institutions1. Non-bank financial institutions1. Non-bank financial institutions1. Non-bank financial institutions(NBFIs)(NBFIs)(NBFIs)(NBFIs)(NBFIs)

Since their establishment in 1972, NBFIshave been intended to support thedevelopment of money and capital marketsand to expand the sources of funds forfinancing business activities. The policy onthe promotion of NBFIs continued to bedirected to enabling the NBFIs to operatesoundly in line with their function. For thispurpose, NBFls are classified into threecategories according to their activities,namely development finance type,investment finance type, and other types.NBFIs of development finance type mainlyengage in extending medium- and long-term loans as well as equity participation incompanies. Accordingly, these institutionsare expected to encourage equityparticipation of the private sector. NBFIs ofinvestment finance type primarily act asbrokers in the issuance of securities and asunderwriters in the sale of securities. NBFIof other type are intended to meet certainneeds of the public, such as extending loansto the medium-income group for houseownership.

At the end of the reporting year, thenumber of NBFIs remained at 14,

comprising 3 of development finance type,9 of investment finance type, and 2 others.The activities of NBFIs in general developedsomewhat unfavorably, as reflected in thedecrease in total assets by 15.4% toRp 2,021 billion, investments by 16.6% toRp 1,910 billion, and fund mobilization by16.6% to Rp 1,931 billion (Tables 4.5 and4.6). These declines mainly occurred inassets, investments, and fund mobilizationof the investment finance type despiteincreases in the activities of thedevelopment finance type. Total assets,investments, and fund mobilization of theinvestment finance type in the reporting yeardeclined, respectively, by 22.6%, 23.9%,and 23.6% to Rp 1,542 billion, Rp 1,468billion, and Rp 1,488 billion. In terms ofplacement of funds, the decrease wasattributable to a decline in investment insecurities, by 24.1% (Rp 459 billion)to Rp 1,446 billion. With respect to fundmobilization, the decrease was attributableto a decline in outstanding securities of3.1% (Rp 29 billion) and to a decline in theoutstanding borrowings of 58.7% (Rp 487billion).

By contrast, NBFIs of developmentfinance type exhibited more favorabledevelopments in the reporting year. Totalassets of development finance and othertypes went up by 20.7% to Rp 479 billion,primarily due to a rise in the placement offunds, by 22.4% to Rp 442 billion, the majorportion of which stemmed from an increasein loans of 34.3% (Rp 59 billion).Significant progress was also registered infunds mobilized, as reflected in anincrease in the amount of funds of 20.7%to Rp 443 billion at the end of March1987. This increase was mainly generatedby increased borrowings and issuance ofsecurities.

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2. Insurance companies2. Insurance companies2. Insurance companies2. Insurance companies2. Insurance companies

Insurance companies in Indonesia can beclassified by type of business into 3categories: life; social; and indemnityinsurance and reinsurance companies. In1986, the number of insurance companiesincreased by 6 to 101. This increase wasregistered by life and indemnity insurancecompanies, each of which rose by 3reaching 23 and 70, respectively. Thenumber of social insurance and reinsurancecompanies remained unchanged at 5 and3, respectively.

Funds mobilized by insurance companiesare primarily invested in time deposits andsecurities. In line with the progress inbusiness, the activities of insurancecompanies showed favorable advancement as

reflected in their increased assets, premiums,and investments.

During 1985, assets of insurancecompanies rose by 23.8%, reachingRp 2,154 billion at the end of that year. Thisincrease was primarily attributable to a risein gross premiums of 9.9% to Rp 891 billion;investments went up by 26.8% to Rp 1,588billion, while claims rose by 8.9% reachingRp 744 billion (Table 4.7).

PT Asuransi Kredit Indonesia (PTAskrindo), as one of the indemnity insurancecompanies, primarily functions to coverinsurance on KIK/KMKP. Insurance providedby PT Askrindo during 1986 amounted toRp 5,120.2 billion or 44.7% higher than thatof the previous year. In line with this increase,premiums totaled Rp 138.6 billion or a rise

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of 19.6%. Claims increased by 1.7% toRp 120.7 billion.

It should be noted that in November 1985,PT Asuransi Ekspor Indonesia (PT Asei) wasestablished with the dual objectives ofproviding export insurance and export creditguarantees. With the establishment of thiscompany, export insurance coverage andexport credit guarantees, which was formerlyundertaken by PT Askrindo, was transferredto PT Asei. Export insurance is intended toguarantee the risk of payments not beingreceived from foreign importers, whereasexport credit guarantee is intended to securebanks and other financial institutions in casedomestic exporters fail to repay their loans.The premium charged on export insuranceranges from 0.2% to 4% of the export valueand that on export credit guarantee rangesfrom 0.5% to 1% of the maximum credit; thecoverage of guarantee borne by PT Asei is85% of the loss. In 1986, insurance coverageprovided by PT Asei reached Rp 2,463

billion, acquired premiums were Rp 15.8billion, while claims amounted to Rp 25.1billion.

Another financial institution engaged inindemnity insurance is the state corporationfor the financial development of cooperative(Perusahaan Umum PengembanganKeuangan Koperasi or Perum PKK), whosemain function is to guarantee risk on loansextended by banks to cooperatives. In1986/87, Perum PKK provided insuranceof Rp 55.2 billion for loans amounting toRp 66 billion. The maximum premiumcharged on this type of guarantee is 2% ofthe guaranteed loan value.

3. Leasing companies3. Leasing companies3. Leasing companies3. Leasing companies3. Leasing companies

Business activities of leasing companieshave increased in importance in the economysince 1974 when they were first regulated.Promotion of the leasing industry is intendedto provide financing alternatives and to

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encourage private investment andindustrialization. In addition, the leasingindustry is also directed at attracting capitalinflows from abroad. Leasing companiesmainly deal as financing companies byproviding capital goods for a certain periodof time on the basis of scheduled payments.Upon termination of the period of contract,the lessee has the right to opt for purchase ofthe capital goods or for the extension of theleasing contract based upon salvage value.At the end of 1986, there were 79 leasingcompanies (up from 69 a year earlier),comprising 1 state, 43 national private and35 joint venture companies. In addition to thisrise in their number, financing by leasingcompanies also showed rapid growth. At theend of 1986, the value of financing, asreflected in the value of leasing contracts,stood at Rp 645.5 billion, up appreciably fromRp 471.9 billion a year before. The funds weremainly used to finance the manufacturing andtransportation sectors as well as for theconstruction of office buildings.

4. Pawnshops4. Pawnshops4. Pawnshops4. Pawnshops4. Pawnshops

The activities of state pawnshops(Perusahaan Jawatan Pegadaian) areintended to provide loans for thelow-income group facing financialdifficulties. As in the previous year, themaximum loan extended to each borrowerwas Rp 200 thousand at an interest ratebetween 3.0% and 4.0% per month anda maximum period of 6 months.

At the end of 1986, the number ofpawnshop offices remained unchangeda t 479 . However, the vo lume o fbusiness advanced somewhat asre f lec ted in loans ex tended andrepayments . In 1986 , loans andrepayments amounted to Rp 285 billion andRp 280 billion, respectively, or 4% and3.3% higher than that of the previousyear. Consequently, outstanding loanswent up by Rp 5 billion to Rp 70 billion(Table 4.8).

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A. GeneralA. GeneralA. GeneralA. GeneralA. General

Based on the principle of a balancedbudget, for the fiscal year 1986/87 thegovernment budget was targeted at a lowerlevel than that of the previous year. Thislower level stemmed from an anticipateddecline in world oil prices and significantlyreduced government revenues. Tocompensate for lower revenues from oilsector, the Government made efforts to raiserevenues from the non-oil sector andeconomized its routine and developmentexpenditures. Efforts to increase revenuesfrom non-oil sources were implementedthrough intensification and extensificationof tax collections as well as throughsimplification of tax administration andthrough enhancement of tax compliance by

the public. To economize on routineexpenditures, the Government imposed afreeze of the level of civil servants’ salariesand reduced subsidies on fuel oils. In orderto economize on development expen-ditures, the Government pursued a policyof expenditures only being used to financethe completion of on-going projects.

The government budget for the fiscal year1986/87 was fixed at a level 7% lower thanthat of the previous year or in the amount ofRp 21,422 billion. However, the outturn for1986/87 reached Rp 21,893 billion, i.e.,2.2% higher than the amount that had beenbudgeted, or 4.1% lower than the outturnfor the preceding year. The higher outturnfor the reporting year was mainly due to theincreased development receipts as well as

VVVVV. GOVERNMENT FINANCE. GOVERNMENT FINANCE. GOVERNMENT FINANCE. GOVERNMENT FINANCE. GOVERNMENT FINANCE

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non-oil/gas tax receipts. Measured in realterms - that is, adjusted for inflation - totalrevenues and expenditures declinedsubstantially in the reporting year.Government savings, representing thedifference between domestic revenues androutine expenditures, totaled only Rp 2,582billion or approximately half the amountbudgeted and about two-thirds of the outturnfor the previous year. The reduction ingovernment savings was accounted for bythe lower domestic revenues originating inoil/gas sector and higher routineexpenditures stemming mainly from asubstantial increase in debt servicepayments on foreign loans. It is worth notingthat the share of government savings inoverall development financing was only31% compared with 67.2% in the precedingyear (Table 5.1).

B. Government RevenuesB. Government RevenuesB. Government RevenuesB. Government RevenuesB. Government Revenues

In the reporting year, governmentrevenues, comprising domestic anddevelopment revenues, reached Rp 21,893billion or 2.2% higher than the amountbudgeted and 4.1% lower than the outturnin the previous year. Domestic revenuesamounted to Rp 16,141 billion, i.e., 9.5%lower than the amount budgeted and 16.2%smal le r than the ou t turn in thepreceding year. Development revenuestotaled Rp 5,752 billion or 60.3% higherthan the amount budgeted and 61% higherthan the outturn in the previous year.

Receipts from oil/gas, representing themajor portion of domestic revenues since1975, amounted to only Rp 6,338 billion,which was 34.9% smaller than the amountbudgeted and 43.1% lower than the outturnin the previous year. The decline was mainlydue to a drop in world oil prices.

Non-oil/gas receipts, which werebudgeted at Rp 8,095 billion, reachedRp 9,803 billion in the reporting year or20.9% higher than the outturn in thepreceding year. The rise was attributable toincreases in revenues originating fromvalue-added tax, import duties, non-taxrevenues, and net profit from oil operation.

During the reporting year, actual receiptsfrom income tax totaled only Rp 2,271billion or 21.2% lower than the amountbudgeted and 1.8% smaller than receiptsof the previous year. The lower receipts wereclosely related to sluggish domesticeconomic activity.

Actual revenues from value-added tax ongoods and services and sales tax onluxurious goods reached Rp 2,900 billionor 35.3% higher than the amount budgetedand 24.6% higher than the outturn for thepreceding year. This rise reflected thesuccess of the Act No. 8 of 1983 on ValueAdded Tax and the improvement in taxadministration as well as enhanced taxcompliance of the public. It should be addedthat the share of value-added tax in non-oil/gas receipts rose to 29.6% from 28.7% inthe preceding year.

Receipts from import duties reachedRp 960 billion in the reporting year or65.5% higher than the budgeted amountand 58.2% higher than the outturn for thepreceding year. This increase was ascribedto a rise in the number of imports of dutiablegoods and to the impact of the September12, 1986 devaluation.

In 1986/87, revenues from excise taxes(consisting of excises on tobacco, sugar,beer, and distilled alcohol) totaled Rp 1,056billion or about the same as the amount

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budgeted and 11.9% higher than theoutturn in the previous year. Achievementof the budget target was attributable to theGovernment’s efforts in collectingdelinquent taxes and improving taxadministration as well as to adjustments inthe base rate of excise duties.

Receipts originating from export taxes inthe reporting year which was also equal to

the budgeted amount, reached Rp 79billion, having increased 54.9% relativeto the outturn in the previous year. Thisincrease stemmed from the higher valueof non-oil/gas exports and from theSeptember 1986 devaluation. It shouldbe added that the policy on export tax inthe reporting year continued to be directedtoward the promotion of exports of finishedgoods.

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Receipts from the land and building tax(Pajak Bumi dan Bangunan or PBB), whichreplaced the land tax (Ipeda), amounted toRp 190 billion or 33.1% below the target.The lower receipts were closely related toslow progress in implementing the PBB Act,which has been effective since January 1,1986. Meanwhile, efforts to raise receiptsfrom PBB continued to be undertaken byenhancing cooperation between the centraland local governments in the areas ofadministration, assessment, and collection oftaxes as well as in the provision of governmentinformation services to tax payers.

Receipts from other direct taxes, such asstamps and auction duties reached Rp 190billion or 59.7% over the amount budgetedand 26.7% higher than the outturn in theprevious year. This rise was brought aboutby higher rates of stamp duties effective asfrom January 1, 1986.

During the reporting year, non-taxreceipts, mainly comprising profits of publicenterprises, contributions from forestexploitation, and royalties, amounted toRp 1,147 billion, i.e., 20.2% above theamount budgeted. These higher receiptswere due to increased profits of the bankingsector. Despite this strong performancerelative to the budgeted amount, the outturnfor 1986/87 was still 23.1% lower than thatin the preceding year.

In the area of oil subsidies, a sharp drop inthe world price of oil - which was not passedon to domestic consumers - combined withincreased efficiencies in refinery operations,resulted in a substantial improvement in oilsubsidies extended to consumers. In sharpcontrast to the budgeted subsidy of Rp 142billion, domestic oil operations registered anet profit of Rp 1,010 billion in 1986/87.

In the reporting year, the outturn ordevelopment receipts originating fromforeign aids donors reached Rp 5,752billion or 60.3% above the amountbudgeted and 61% higher than the outturnin the preceding year. Developmentreceipts, comprising program aid andproject aid, amounted to Rp 1,957 billionand Rp 3,795 billion, respectively. Programaid consisted of aid-in-kind in the amountof Rp 81 billion, and of aid that could beconverted to rupiah amounting to Rp 1,876billion. The share of foreign aid ingovernment revenues went up from 15.6%to 26.3%; utilization of these fundscontinued to be directed toward highpriority projects.

C. Government ExpendituresC. Government ExpendituresC. Government ExpendituresC. Government ExpendituresC. Government Expenditures

Actual government expenditures,comprising routine and developmentexpenditures, reached Rp 21,891 billion inthe reporting year or 2.2% higher than thebudgeted amount and 4.1% lower than theoutturn in the preceding year (Table 5.3).

Actual routine expenditures, includingpersonnel and material expenditures,subsidies to local governments, andamortization and interest payments, andfood stock expenditures reached Rp 13,559billion or 3.3% higher than the amountbudgeted and 13.5% above the outturn ofthe preceding year. This increase was mainlyattributable to a rise in debt servicepayments for foreign loans.

In the reporting year, personnel outlaysreached Rp 4,311 billion or 2.3% abovethe amount budgeted and 7.3% higherthan the outturn in the previous year. Thisrise was mainly due to the recruitment ofcivil servants.

47

48

Expenditures on materials totaledRp 1,366 billion or about the same as theamount budgeted and the outturn for theprevious year.

Subsidies to local governments amountedto Rp 2,650 billion in 1986/87 or 0.4%above the budget and 6.5% higher than theoutturn in the preceding year. This increase

was principally due to the recruitment ofadditional elementary school teachers underthe Presidential Instruction program as wellas nurses and paramedics for public healthcenters.

Realization of expenditures on theprincipal and interest payments for foreignloans reached Rp 5,058 billion or 19.8%

49

higher than the amount budgeted and52.2% above the outturn in the previousyear. The increase was attributable to theSeptember 1986 devaluation and thedepreciation of the US dollar against othermajor currencies.

Due to funding constraints, the fund forfood reserves, which was budgeted atRp 417 billion, amounted to only Rp 29billion in the reporting year.

Development expenditures in 1986/87continued to be directed toward supportingthe achievement of development targets,namely increasing production andemployment opportunities through 8development programs covering 18 sectors.Actual outlays amounted to Rp 8,332 billionor 0.4% higher than the amount budgetedand 23.4% lower than the outturn in theprevious year (Table 5.4). It may be notedthat a major portion of the outlays was usedto finance economic programs (46.6%);smaller, but significant, amount were usedfor education and culture programs (16.4%),and regional, business and environmentprograms (15.9%)

D. Government Budget for FiscalD. Government Budget for FiscalD. Government Budget for FiscalD. Government Budget for FiscalD. Government Budget for FiscalYYYYYear 1987/88ear 1987/88ear 1987/88ear 1987/88ear 1987/88

For the fiscal year 1987/88, theGovernment adopted firm adjustmentmeasures in order to increase revenues andtighten expenditures. The measures to raise

revenues are expected to be implementedthrough efforts to increase receipts fromtaxation and the local cost component offoreign borrowings. On the side of routineexpenditures, the Government continues topursue its austerity policy mainly byreducing materials expenditures andcontinuing its freeze of government salaries.Regarding development expenditures, theGovernment continues to give priority tothe completion of on-going projects.Overall, the government budget for the fiscalyear 1987/88 is fixed at Rp 22,738 billion or6.4% higher than that of the previous year.

Domestic revenues are targeted atRp 17,236 billion, comprising receipts fromoil/gas amounting to Rp 6,939 billion andnon-oil/gas totaling Rp 10,297 billion.Development receipts are budgeted atRp 5,547 billion, consisting of program aidamounting to Rp 1,128 billion and projectaid Rp 4,419 billion.

Routine expenditures are budgeted atRp 15,026 billion, a major portion of whichis allocated for debt service payments onforeign loans (Rp 6,805 billion) andpersonnel outlays (Rp 4,317 billion).Consequently, government savings areestimated at Rp 2,210 billion or a declineof 14.4% compared with the outturn for1986/87. Due to lower government savings,development expenditures are budgeted atRp 7,757 billion or 6.9% lower than theoutturn or 1986/87.

50

A. WA. WA. WA. WA. World Economic Developmentsorld Economic Developmentsorld Economic Developmentsorld Economic Developmentsorld Economic Developments

In 1986, the world economy wascharacterized by a decline in growth, i.e.,3.2% compared with 3.3% in 1985 (Table6.1). This lower growth in 1986 was due toa decline in growth in the developedcountries that was partly offset by a slightacceleration in the output of developingcountries. Lower growth in developedcountries mainly reflected higher externalimbalances in several industrial countries,the appreciation of the Japanese yen andGerman mark vis-a-vis the US dollar, andlower growth of exports. On the other hand,the higher growth of developing countrieswas contributed by significant growth inexport volumes resulting from improvedcompetitiveness of their products in worldmarkets.

The average inflation rate (as measuredby consumer price index) moderated inboth developed and developing countriesin 1986. The deceleration was affected bythe falling prices of oil and other primarycommodities and by domestic policiesaimed at curbing inflation in most countries.Meanwhile, the overall unemployment ratein the developed countries remained rela-tively unchanged from the preceding year.

1. Developed countries1. Developed countries1. Developed countries1. Developed countries1. Developed countries

Economic growth rate of all membercountries of the Organization for EconomicCooperation and Development (OECD), asmeasured by gross domestic product (GDP)or gross national product (GNP), declinedto 2.5% in 1986 from 3.0% in the year

before. This slowdown was mainly attributedto increased external imbalances asreflected in the divergent movements in thecurrent accounts of the United States, Japanand the Federal Republic of Germany, andthe persistent protectionism imposedespecially by several developed countries.In addition, uncertainties associated withexchange rates developments among themajor currencies weakened the growth ofprivate investment in several countries. Theeconomic growth rates of the seven majorOECD countries also showed a decline from3.0% to 2.5%, with a decline common to allcountries, except Italy and France. Amongthe seven major industrial, countries, thehighest growth rate was achieved byCanada, whereas the lowest occurred inFrance.

The inflation rate in developed countriesdecreased markedly, namely from 4.5% in1985 to 2.6% in 1986, the lowest rate since1980. The decrease was not only due to adrop in world oil prices and weakeningprices of other primary commodities, butalso was aided by government efforts since1980 in several countries to curb inflationthrough fiscal and monetary policies. It canbe added, the lowest inflation rate amongmajor industrial countries was experiencedby the Federal Republic of Germany, whilethe highest was recorded in Italy. The overallunemployment rate in developed countriesslightly declined in 1986 from 8.4% to8.3%. The unemployment rate in the sevenmajor industrial countries remainedunchanged at 7.4% in 1986. This wasattributed to a slow improvement in theEuropean employment situation offsetting

Vl. WORLD ECONOMIC AND INTERNAVl. WORLD ECONOMIC AND INTERNAVl. WORLD ECONOMIC AND INTERNAVl. WORLD ECONOMIC AND INTERNAVl. WORLD ECONOMIC AND INTERNATIONAL MONETTIONAL MONETTIONAL MONETTIONAL MONETTIONAL MONETARARARARARYYYYYDEVELOPMENTS, INTERNADEVELOPMENTS, INTERNADEVELOPMENTS, INTERNADEVELOPMENTS, INTERNADEVELOPMENTS, INTERNATIONAL RELATIONAL RELATIONAL RELATIONAL RELATIONAL RELATIONSTIONSTIONSTIONSTIONS

AND REGIONAL COOPERAAND REGIONAL COOPERAAND REGIONAL COOPERAAND REGIONAL COOPERAAND REGIONAL COOPERATIONTIONTIONTIONTION

51

rapid growth of employment in the UnitedStates and Canada. Among the seven majorindustrial countries, the lowestunemployment rate was recorded in Japan,while the highest was in the UnitedKingdom.

In 1986, international trade of industrialcountries was characterized by imbalancesas reflected in the widened US merchandisetrade deficit and the increased tradesurpluses of Japan and the FederalRepublic of Germany. In addition, othermajor industrial countries experiencingimprovements in their trade balance wereItaly and France, while the United Kingdom

and Canada experienced deterioration.Taking into account the development of theservices balance, Italy, Japan, France, andthe Federal Republic of Germany among theseven major industrial countries recordedimprovements in their current account. Itis worth noting that the largest deficit incurrent account was still experienced by theUS, while Japan continued to record thelargest surplus (Table 6.2).

Canada’s economic growth slackened from4.0% to 3.1% in 1986 as a consequence ofdecreases in the growth of domestic demandand net foreign balance, from 4.6% and —4.7% to 3.5% and —8.5%, respectively.

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53

The sluggish domestic demand was mainlyattributable to a decline in privateconsumption and gross fixed investmentgrowth, from 5.0% and 6.1% to 4.0% and2.6%, respectively. The slower growth ofgross fixed investment was mainly attributedto a decrease in non- residential privateinvestment growth, namely from 4.1% to-0.8%. Meanwhile, the slower growth of netforeign balance was reflected in the slowergrowth of both exports and imports of goodsand services, namely from 5.8% and 7.796to 3.1% and 5.1%.

The rate of inflation increased from 4.0%to 4.2% in 1986, partly due to thegovernment policy to raise indirect taxesand to the depreciation of Canadian dollar.Unemployment rate decreased from 10.5%to 9.6% as a consequence of an increase inemployment opportunities, particularly inservices sector.

Trade account surplus declined from$ 13.1 billion to $ 7.7 billion in 1986.Coupled with the deterioration in servicesbalance, the current account deficit widenedfrom $ 0.4 billion to $ 6.3 billion.

In France, economic growth increasedfrom 1.4% to 2.0% in 1986, due to anincrease in domestic demand from 2.1% to3.8%. The increase in domestic demand wasmainly attributed to higher growth of privateconsumption and gross fixed investment,from 2.4% and 3.2% to 3.1% and 4.2%,respectively. The higher privateconsumption growth was mainly induced byhigher real disposable income and the taxrelief. In the meantime, higher growth ofgross fixed investment was mainlyattributable to an increase in non-residential private investment growth,namely from 5.2% to 6.4%. The lower

growth of net foreign balance was ascribedto a decline in export growth of goods andservices, from 2.4% to 0.1% and anincrease in import growth of goods andservices, from 5.2% to 7.1%.

Inflation rate decreased remarkably, from5.8% to 2.7% in 1986, due primarily to afall in import prices. In addition, domesticpolicies, such as controlling public financeand appreciation of the French franc, alsocontributed to the low inflation rate.Unemployment rate in 1986 increased from10.2% to 10.5% in spite of the governmentpolicies to enhance employmentopportunities.

Trade balance deficit declined from $ 5.4billion to $ 1.6 billion as a result of anincrease in exports from $ 95.2 billionto $ 118 .8 b i l l ion , although importsincreased from $ 100.6 billion to $ 120.4billion. Higher exports were primarilyattributed to an improvement in externalcompetitiveness, especially those ofmanufactured goods. Services balancesurplus declined from $ 5.2 billion to $ 5.1billion. Hence, the current account recordeda significant improvement, from a deficit of $0.2 billion to a surplus of $ 3.5 billion.

In 1986, the economy of the FederalRepublic of Germany slackened in growth,from 2.5% to 2.4%, due to a drop in netforeign balance growth, from 25.7% to-22.3%, while domestic demand grew from1.5% to 3.7%. The decrease in net foreignbalance growth was primarily due tosubstantial weakening of export growth ofgoods and services from 7.3% to -0.5%,owing to a significant appreciation of theGerman mark, although import growthdecreased from 4.7% to 3.2%. In themeantime, the increase in domestic demand

54

growth was induced by an increase in privateconsumption growth from 1.8% to 4.3% andan increase in gross fixed investment growthfrom -0.4% to 3.3%.

In contrast with other major industrialcountries, Federal Republic of Germanyrecorded a deflation of 0.2% as againstinflation of 2.2% in the previous year, whichwas mainly brought about by a decline inprices of imported goods. Unemploymentrate declined from 8.3% to 8.0%, due tomore labor absorption in the manufacturingsector.

Trade balance surplus increased from$ 28.9 billion to $ 57.3, billion, emanatingfrom an increase in exports from $ 173.4billion to $ 232.6 billion, eventhoughimports rose from $ 144.5 billion to $ 175.3billion. Services balance deficit increasedfrom $ 15.7 billion to $ 21.5 billion. Hence,current account surplus rose from $ 13.2billion to $ 35.8 billion.

In 1986, the economy of Italy grew by2.7% compared with 2.3% in the precedingyear, mainly attributed to higher growth ofdomestic demand from 2.4% to 3.2% despitethe downturn growth of net foreign balancefrom 1.5% to -10.6%. The higher growth ofdomestic demand was reflected in anincrease in private as well as governmentconsumption growth from 1.9% and 2.5%to 3.2% and 2.9%, respectively. In themeantime, growth of gross fixed investmentwent down from 4.1% to 1.2%. Thedownturn growth of net foreign balance wasattributable to higher growth of import ofgoods and services (5.2%) relative to thatof export (3.0%).

The rate of inflation decreased remarkablyin 1986 from 8.6% to 6.1%, partly owing to

a reduction in wholesale prices. In themeantime, unemployment rate went up from10.1% to 10.9%.

In 1986, trade balance improved from adeficit of $ 7.0 billion to a surplus of $ 2.7billion. Taking into account the servicesbalance, a remarkable improvement wasrecorded in the current account, from a defi-cit of $ 4.2 billion to a surplus of $ 5.1 billion.

The economic growth of Japan in 1986recorded a sharp decline from 4.7% to2.5%, due mainly to a sharp decrease innet foreign balance growth from 29.8% to-33.3%, while domestic demand growthincreased from 3.8% to 4.0%. The downturngrowth of net foreign balance was primarilydue to a significant appreciation of yen andthe lower net foreign demand. On thecontrary, higher growth of domestic demandwas mainly augmented by increasedgovernment consumption growth from 2.8%to 6.6% and that of gross fixed investmentfrom 5.6% to 6.5%.

Inflation rate in 1986 showed a signifi-cant decline from 2.1% to 0.4%, mainly dueto lower import prices resulting from the yenappreciation. Unemployment rate roseslightly from 2.6% to 2.8% in 1986.

Trade balance surplus increased from$ 56.0 billion to $92.7 billion, contributedby an increase in exports from $ 174.0billion to $ 205.6 billion and a decline inimports from $118.0 billion to $ 112.9billion. The increase in exports wasattributable to the export valued in dollarterms despite a decline in volume. In themeantime, services balance decreased from$ 6.8 billion to $ 6.7 billion, bringing fortha rise in current account surplus from $ 49.2billion to $ 86.0 billion.

55

The economic growth of the UnitedKingdom in 1986 slowed down from 3.5% to2.7%, mainly emanating from the lowergrowth of net foreign balance from 326.9% to-80.1%, while growth of domestic demandincreased from 2.8% to 3.2%. The lowergrowth of net foreign balance was mainlycontributed by a sluggish growth of export ofgoods and services from 5.8% to 3.0% andhigher growth of imports from 3.1% to 5.8%.In the meantime, improvement in domesticdemand growth was attributed to higher growthof private and government consumption from3.6.% and 0.2% to 4.7% and 1.2%,respectively, while that of gross fixedinvestments declined from 1.8% to 0.6%. Thedecline in the growth of gross fixed investmentwas partly attributed to a downturn growth innonresidential private investment from 10.1%to -2.6%.

Inflation rate decreased from 6.1% to3.4% in 1986, mainly due to a significantdrop in oil prices. Meanwhile, unemploy-ment rate in 1986 increased slightly from11.7% to 11.8%.

Trade balance deficit widened from $ 2.8billion to $ 12.1 billion, as a result of asubstantial increase in imports from $ 103.0billion to $ 118.9 billion despite an increasein exports from $ 100.2 billion to $ 106.8billion. The increase in imports was mainlyattributed to the deterioration in thecompetitiveness of domestic products, whilethe lower increase in exports was largelyaffected by the falling oil prices. Although theservices balance surplus increased from $ 6.6billion to $ 10.5 billion, the current accountworsened from a surplus of $ 3.8 billion to adeficit of $ 1.6 billion in 1986.

The economic growth of the United Statesdecelerated from 2.7% to 2.5% in 1986, dueto lower growth of net foreign balance although

growth of domestic demand increased. Thenet foreign balance growth decreased from-29.4% to -36.6% as a consequence of highergrowth of imports of goods and services(10.2%) relative to that of exports (2.5%). Onthe contrary, growth of domestic demandincreased from 3.4% to 3.5% in 1986, mainlycontributed by higher growth of privateconsumption from 3.5% to 4.1% due to anincrease in real disposable income. In themeantime, growth of government consumptionand private fixed investments decreasedsignificantly from 6.8% and 7.7% to 3.5% and1.9%, respectively. The slower growth ofprivate fixed investment was mainly recordedin non-residential sector, namely from 9.3%to -1.0%.

Inflation rate in 1986 declined from 3.5%to 1.8%, mainly attributable to a drop in oilprices despite the dollar depreciation vis-a-vis other major currencies. Unemploy-ment rate in 1986 moderated from 7.2% to7.0%, mainly resulting from greater laborabsorption in services sector.

With regard to foreign trade sector, tradebalance deficit rose markedly from $ 124.4billion to $ 147.7 billion, emanating from asignificant increase in imports from $ 338.8billion to $ 369.5 billion inspite of an increasein exports from $ 214.4 billion to $ 221.8billion. The increase in imports was mainlyattributable to a remarkable increase inimport volume, especially petroleum products,resulting from the falling oil prices. Althoughservices balance recorded an improvement,current account deficit continued to increasefrom $ 117.7 billion to $ 140.6 billion.

As was the case with the seven major OECDcountries, in 1986 the economic growth ofother OECD countries (17 countries) alsodecelerated from 3.1% to 2.5%. Thisdeceleration was primarily attributable to a

56

significant decline in the growth of exports,resulting from downward prices. In themeantime, net foreign balance grew from 3.0%to 3.5%. Among the other OECD countries,the highest growth was achieved by Turkey(8.0%), whereas the lowest was recorded inNew Zealand (-0.6%).

Inflation rate in the other OECD membercountries also moderated, from 5.8% to 4.9%.Average inflation rate in those countries waslower than that of the major OECD countries.The lower inflation rate in the other OECDcountries was mainly contributed by a declinein oil prices. Inflation rate declined in all ofthose countries, except Greece, Norway,Spain, and Australia. As was in the previousyear, the lowest inflation rate was recorded inthe Netherlands (0.3%), while the highest inTurkey (34 5%)

Unemployment rate in other OECD membercountries in 1986 declined from 12.1% to11.6%. The relatively low unemployment rateswere recorded in Iceland (0.7%), Switzerland(0.8%), and Luxemburg (1.5%), while therelatively high unemployment rates wererecorded in Spain (21.5%), Ireland (17.9%),and Turkey (15.1%).

In 1987, the economic performance ofdeveloped countries is projected to remainuncertain. The economic growth of developedcountries in 1987 is estimated not to be betterthan the year before, due primarily to thepersistent external imbalances amongindustrial countries, the remarkable USbudget deficit, the misalignment ofexchange rate of major currencies, the lowprices of export commodities in the worldmarket, and the persistent protectionimposed by several industrial countries.Meanwhile, inflation and unemploymentrates in developed countries are projectedto decline in 1987.

2. Developing countries2. Developing countries2. Developing countries2. Developing countries2. Developing countries

The economic growth of developingcountries in 1986 increased from 3.3% to4.0%, which was closely associated with thehigher exports, due to improvement inexternal competitiveness. In addition, thehigher growth was also attributed to theadjustment measures adopted in severaldeveloping countries. Among the developingcountries in the region group, higher increasein economic growth occurred in WesternHemisphere, the Middle East and Europe,while lower increase in growth was recordedin Asia, and Africa. However, despite thelower growth, Asia still recorded the highestlevel of growth as compared with the othergroup of developing countries.

Average inflation rate in developingcountries declined sharply from 39.4% to29.0%, largely attributable to the adoptionof price control policy in Argentina, Brazil,Bolivia, and Israel whose average inflationrate fell from 300.0% to 120.0%. It shouldbe added that the drop in inflation rateoccurred in all regions, except Africa andAsia.

In 1986, the economic growth of oilexporting developing countries of OPECmembers increased from 0.3% to 0.9%,mainly attributable to an increase in oilproduction. In addition, the growth of domesticdemand also went up as a result of governmentefforts to induce higher growth of domesticinvestments. In the meantime, inflation raterose from 13.3% to 19.2%. With regard toforeign sector, trade balance surplus fell from$ 57.1 billion to $ 15.3 billion, due to a higherdecline in exports relative to that in imports,namely from $ 156.1 billion and $ 99.0 billionto $ 102.0 billion and $ 86.7 billion. Thedecrease in exports was mainly attributed tothe sharp decrease in oil prices. Although,

57

services balance deficit decreased from $ 53.7billion to $ 45.3 billion, current accountdeteriorated from a surplus of $ 3.4 billion toa deficit of $ 30.0 billion.

In 1986, the economy non-oil exporting ofdeveloping countries grew from 4.7% to 5.8%due to higher export volume growth. In thesame period, inflation rate decelerated from53.3% to 33.5%. In the international sector,trade balance deficit declined from $ 10.7billion to $ 6.7 billion due to an increase inexports from $ 378.5 billion to $ 399.4 billiondespite a rise in imports from $ 389.2 billionto $ 406.1 billion. In the meantime, servicesbalance deficit decreased from $ 16.6 billionto $ 11.1 billion. Hence, the current accountdeficit declined from $ 27.3 billion to $ 17.7billion.

The economic growth of developingcountries is projected to decline in 1987. Thisis based on the expectations that the externalcondition would still be unfavorable asreflected in the sluggish foreign demand ofdeveloped countries, the limited capitalinflows from developed countries to induce

investments, the heavier debt burden, and thepersistent protection imposed by developedcountries on export commodities fromdeveloping countries.

3. ASEAN countries3. ASEAN countries3. ASEAN countries3. ASEAN countries3. ASEAN countries

In 1986, real GDP growth of ASEANcountries increased from 0.6% to 1.7%,mainly contributed by the achievement ofadjustment measures to induce their domesticdemand as well as to promote exports. Themeasures comprised, among others; taxrelieves, reduction in interest rates,management of realistic exchange rates,deregulation of industrial and trade sectorswhich successfully reduced production costand expedited production activities. In themeantime, inflation rate decelerated from7.1% to 4.0%, mainly attributed to the pricecontrol and a decrease in oil prices (Table6.3). With respect to international trade sector,among the ASEAN countries, the Philippines,Singapore, and Thailand registeredimprovements in their trade account, whereasthe other countries experienced the reverse.Taking into account services balance, the

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countries which had improvements in currentaccount were Malaysia, the Philippines,Singapore, and Thailand, while the reverseoccurred in Indonesia (Table 6.4).

B. International MonetaryB. International MonetaryB. International MonetaryB. International MonetaryB. International MonetaryD e v e l o p m e n t sD e v e l o p m e n t sD e v e l o p m e n t sD e v e l o p m e n t sD e v e l o p m e n t s

International monetary developments in1986 were characterized by persistentweakening of US dollar against the othermajor currencies, heavier debt burdens ofdeveloping countries, net capital outflows fromdeveloping countries, unfavorabledevelopments in international liquidity, andcontinued high interest rates in majorindustrial countries. These factors inhibitedinternational monetary stability and worldeconomic growth. To help address thissituation, the major industrial countries haveagreed to improve the coordination of theirmacro economic policy as had been confirmedin the Tokyo summit meeting in May 1986.

After reaching a peak in February 1985,the US dollar depreciated markedly vis-a-visthe currencies of most major industrialcountries and the depreciation continued into1987. The highest depreciation was againstthe German mark (20.8%), the Japanese yen(20.0%), and the French franc (15.0%). Thesharp depreciation of the US dollar partlyreflected a move toward convergence ingrowth, inflation, and financial conditionsamong the major industrial countries. Thedrop was also aided at times by officialstatements such as the so-called PlazaAgreement among the Group of Five countries(France, the Federal Republic of Germany,Japan, the United States and the UnitedKingdom) on September 22, 1985.

Debt burdens of the developing countriesbecame more onerous in 1986, as theoutstanding amount rose to $ 1,094.9 billion

compared with $ 1,009.1 billion in thepreceding year. The debt service ratio (DSR),as measured by interest and amortizationpayments in relation to exports, increasedfrom 20.5% in 1985 to 22.4% despite areduction in interest rates in 1986. For thegroup of 15 heavily indebted developingcountries,1) the DSR increased from 38.7%to 43.9%.

The average nominal short-term andlong-term interest rates in major industrialcountries declined somewhat in 1986,although they remained at a relatively highlevel, 6.9% and 7.5%, respectively. Thedecline in nominal short-term interest ratesin several major industrial countries, such asJapan, the Federal Republic of Germany, andthe United Kingdom, was closely associatedwith looser monetary policy as reflected inexpansion of the money supply. The declinein nominal long-term interest rates was mainlybased on a view that inflation would moderateowing to more cautious fiscal policies, suchas those adopted by the United States andFrance and the low prices of oil and otherprimary commodities.

International liquidity, as reflected in totalinternational reserves, recorded an increase,from SDR 437.5 billion at the end of 1985 toSDR 452.8 billion a year later.2) There was amarked rise in reserves of the industrialcountries (from SDR 254.8 billion to SDR278.3 billion) that was partly offset by adecrease in developing countries (from SDR161.9 billion to SDR 136.5 billion). The sharpdrop in oil prices constituted the main causeof a decline in international liquidity of the

1) The group of heavily indebted countries comprisedArgentina, Bolivia, Brazil, Chile, Columbia, Coted’lvoire, Ecuador, Mexico, Morocco, Nigeria, Peru, the

Philippines, Uruguay, Venezuela, and Yugoslavia.

2) Estimated figures of the IMF.

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oil exporting developing countries, from SDR69.3 billion to SDR 51.9 billion at the endof 1986. Also, weakening prices of otherprimary commodities reduced internationalliquidity of the non-oil exporting developingcountries, from SDR 92.6 billion to SDR84.6 billion.

C. International Relations andC. International Relations andC. International Relations andC. International Relations andC. International Relations andRegional CooperationRegional CooperationRegional CooperationRegional CooperationRegional Cooperation

1. 1. 1. 1. 1. International Monetary Fund (IMF)International Monetary Fund (IMF)International Monetary Fund (IMF)International Monetary Fund (IMF)International Monetary Fund (IMF)

In 1986/87, Indonesia’s transactions withthe IMF comprised payments andremuneration. In the reporting year, Indonesiamade payments on the CompensatoryFinancing Facility (CFF) and on the SDRallocation, namely SDR 2.6 million and SDR15.0 million, respectively. On the other hand,Indonesia received remuneration amountingto SDR 3.0 million. Since there were norepayments made on the CFF facility, theamount outstanding remained unchanged fromthe preceding year, namely SDR 42.0 million.

2. W2. W2. W2. W2. World Bank grouporld Bank grouporld Bank grouporld Bank grouporld Bank group

World bank group consists of theInternational Bank for Reconstruction andDevelopment (IBRD), the InternationalDevelopment Association (IDA), and theInternational Finance Corporation (IFC). Inthe reporting year, the IBRD approved newloans to Indonesia amounting to $ 1,066.6million to finance projects in transportationand communication, housing, energy,agriculture, trade, education and health. Theamount of these loans decreased a littlerelative to the preceding year ($ 1,103.1million). In addition to the new project loansjust mentioned, in 1986/87 the IBRD alsoapproved a Trade Policy Adjustment Loanamounting to $ 300 million to finance generalimports.

Up to the end of 1986/87, loans approvedby IBRD reached $ 9,758.4 million, of which$ 4,941.3 million (50.6%) had beendisbursed. The largest portion of thedisbursed amount (67.9%) has been utilizedfor electricity, agriculture, and transportationand communication. At the end of thereporting year, outstanding loans amountedto $ 4,092.7 million.

The maturity of IBRD loans, which dependson the type of projects, generally ranges from7 to 30 years including a grace period of 3 to10 years. The average interest rate for theperiod of July to December 1986 was 8.2%p.a. and decreased slightly to 7.9% p.a. forthe period of January to June 1987.

Up to the end of 1986/87, loans approvedby IDA remained at $ 943.5 million; the fundshave been used for financing 48 projects inagriculture, industry, transportation,electricity, and improvement of villages. Ofthe total amount of funds, $ 887.3 million(94.0%) had been disbursed and outstandingloans at the end of the reporting year amountedto $ 878.2 million. The maturity of the IDAloans is 40 years, including a grace period of10 years, without interest charges but with aservice fee of 0.75% p.a. charged on theamount disbursed.

The IFC provides financial assistance tothe private sector in the forms of loans andequities. By the end of the reporting year,outstanding financial assistance amountedto $ 173.5 million, comprising $ 153.4million in the form of loans and theremainder in the form of equities. Of thetotal financial assistance, $ 45.4 millionoriginated with the IFC’s funds, whereas theremainder came from syndications.Financial assistance has been provided to15 private companies in the industry,financial institution, and tourism sectors.

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3. Asian Development Bank (ADB)3. Asian Development Bank (ADB)3. Asian Development Bank (ADB)3. Asian Development Bank (ADB)3. Asian Development Bank (ADB)

In 1986/87, the amount of loansapproved by the ADB for Indonesia reached$ 319.1 million, all of which originated withOrdinary Resources. The loans were utilizedfor financing 6 projects, namely irrigation($ 149.5 million), agriculture ($ 70.0million), communication ($ 40.0 million),education ($ 29.0 million), and SpecialProject Implementation Assistance ($ 30.6million). At the end of 1986/87, the totalcommitted loans reached $ 3,773.1 million,of which $ 162 .3 mi l l ion was f romSpec ia l Funds fo r f inanc ing 23projects, and $ 3,610.8 million fromOrdinary Resources for 95 projects. Of thetotal loans approved, $ 1,156.4 million hasbeen disbursed comprising $ 1,015.2million under Ordinary Resources with theremainder under Special Funds.

The maturity of loans from OrdinaryResources ranges from 10 to 30 years,including 2 to 7 years of grace period. Theinterest charged on the Ordinary Funds wasaltered on July 1, 1986, from a fixed rate to aflexible rate. The interest rates for the periodJuly - December 1986 stood at 6.86%compared with 9.65% for the periodJanuary - June 1986.

The maturity of loans from Special Fundsranges from 24 to 30 years, including 7 to10 years of grace period, without interestcharges but a service fee of 1% p.a. chargedon the amount disbursed. It is noteworthythat since the end of June 1979, Indonesiahas not been eligible for concessional loansfrom Special Funds.

4. Islamic Development Bank (IDB)4. Islamic Development Bank (IDB)4. Islamic Development Bank (IDB)4. Islamic Development Bank (IDB)4. Islamic Development Bank (IDB)

Up to the end of 1986/87, the financialassistance provided by IDB to Indonesia

amounted to ID 43.5 million,3) consistingof ID 16.8 million in equity participation,ID 8.6 million for leasing, ID 3.1 million forinstallment sales, and ID 15.0 million forloans. Of this financial assistance, ID 16.8million (38.5%) has been disbursed,comprising both loans (ID 5.2 million) andequity (ID 11.6 million).

5. Inter-Governmental Group on In-5. Inter-Governmental Group on In-5. Inter-Governmental Group on In-5. Inter-Governmental Group on In-5. Inter-Governmental Group on In-donesia (IGGI)donesia (IGGI)donesia (IGGI)donesia (IGGI)donesia (IGGI)

At the 29th IGGI meeting in The Hague onJune 18-19, 1986, it was agreed that financialassistance amounting to $ 2,519.4 millionwould be made available for Indonesia in1986/87; bilateral assistance from donorcountries amounted to $ 838.4 million whilemultilateral financial institutions committed$ 1,681.0 million. Up to the end of thereporting year, total IGGI loans approvedamounted to $ 43,749.1 million, of which$ 30,374.5 million originated with donorcountries and $ 13,374.6 million frommultilateral financial institution. Disbursedloans amounted to $ 30,723.7 million(70.2%), consisting of $ 23,864.9 million fromdonor countries and $ 6,858.8 million frommultilateral financial institutions.

6. Association of South East Asian6. Association of South East Asian6. Association of South East Asian6. Association of South East Asian6. Association of South East AsianNations (ASEAN)Nations (ASEAN)Nations (ASEAN)Nations (ASEAN)Nations (ASEAN)

During the reporting year, economiccooperation among ASEAN countriescontinued to expand in the fields of trade,industry, finance, and banking. In addition,dialogues between ASEAN and severalindustrial countries continued to be conducted.

In the field of trade, the ASEAN EconomicMinisters at their 18th meeting in Manila in

3) ID 1,00 (Islamic Dinar) = SDR 1,00.

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August 1986 approved the establishment ofthe ASEAN Preferential Tariff Quota Schemein order to improve the implementation of theASEAN Preferential Trading Arrangement(PTA). This scheme provides a minimum of25% special concessions on import duties toitems classified as semi sensitive goods.

In the area of industry, the ASEANCommittee on Industry, Minerals and Energy(COIME) in its meeting of August 1986 inManila approved several types of ASEANIndustrial Joint Venture (AIJV) productions,namely automotive components which wouldbe produced on a joint-venture basis. Tostimulate interest in joint-venture programs,the 18th ASEAN Economic Ministers meetingapproved an increase in the minimum marginof tariff preference for AIJV products from50% to 75%. Among the ASEAN industrialprojects, successful projects included theASEAN Urea Fertilizer Projects in Aceh,Indonesia, and in Bintulu, Malaysia.

In the financial field, the ASEAN Committeeon Finance and Banking (COFAB) in itsmeeting in Bangkok in January 1986discussed a proposal which was delivered bythe ASEAN Economic Ministers to the centralbank governors on the use of the ASEANcurrencies as a medium of exchange forintra-ASEAN trades. In addition, the meetingalso discussed the role of ASEAN FinanceCorporation (AFC) in financing ASEANprojects and proposed implementation of theIntra-ASEAN Model of Double TaxationConvention as soon as possible in order toavoid double taxation among membercountries. The ASEAN Swap Arrangement,

established in August 1977, was designed toprovide short-term liquidity to membercountries with temporary balance of paymentsfinancing needs. Pursuant to the agreementsigned in January 1987, the ASEAN SwapArrangement was extended for another 5 yearswith effect from August 5, 1987. It should benoted that the maximum amount of fundsavailable under the scheme remained at $ 200million with each country being entitled todraw a maximum amount of $ 80 million.

In a dialogue between ASEAN and theUnited Stated held in Singapore in May 1986,a memorandum on an ocean resourcesexploitation project was signed. This projectwould extend over 5 years and would befinanced by the USA. In addition, financialassistance to the ASEAN Economic ResearchUnit was extended until December 1987. Inthe ASEAN - Japan Economic Ministersmeeting held in Tokyo in July 1986, adiscussion was held regarding efforts topromote trade, investment, and the transferof technology from Japan to ASEAN countries.

The ASEAN - EEC foreign ministersmeeting in Jakarta in October 1986concluded the establishment of the ASEAN- European Community Joint InvestmentCommittee which is an effort to encourageEEC investment in ASEAN countries.

The ASEAN - Canada Joint CooperationCommittee in its meeting in Bangkok inNovember 1986 approved the provision offunds by the Canadian InternationalDevelopment Agency to encourage privateinvestment in ASEAN countries.

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A. Balance of Payments PolicyA. Balance of Payments PolicyA. Balance of Payments PolicyA. Balance of Payments PolicyA. Balance of Payments Policy

1. General1. General1. General1. General1. General

In 1986/87, Indonesia’s balance ofpayments encountered substantialpressures, mainly attributable to the sharpdecline in world oil prices since January1986 including an unexpected drop below$ 10.00 per barrel in August 1986. Inaddition, the continuing depreciation of theUS dollar, the decline in world prices ofseveral major non-oil primary commodities,the slow recovery of the world economy, andhigher levels of protection imposed by anumber of industrial countries have alsocontributed to the pressures on theIndonesia’s balance of payments.

In view of the severe pressures and in theabsence of immediate signs of improvementin world oil prices, on September 12, 1986,the Government undertook a 31% rupiahdevaluation against the US dollar in orderto avoid further deterioration in the balanceof payments. In support of this measure, theGovernment undertook fundamental adjust-ment policies on October 25, 1986 andJanuary 15, 1987 as a follow up to the May6, 1986 package.

The May 6, 1986 policy package wasdesigned to enhance domestic efficiency andto improve the international competitivenessof non-oil/gas export commodities by easingimport restrictions on certain inputs, byproviding exemption and drawback on importduties, and by establishing bonded zones.The package was also intended to promoteprivate investment through the provision offacilities to PMA companies. The October 25,

1986 policy package represented a furthereffort to enhance efficiency in domesticproduction and simultaneously promote non-oil/gas exports by gradually replacing thenon-tariff barrier system with a tariff system,and by improving the stipulation on importduties and additional import duties. To attractcapital inflows, the Government revoked theceiling on reswap facilities and providedvarious facilities to PMA companies. TheJanuary 15, 1987 policy package was aimedat simplifying the procedure to import certainindustrial goods and at improving further theregulation on import duties and additionalimport duties. Also, on October 2, 1986 in aneffort to economize the use of foreign exchangeearnings for more productive purposes, theGovernment raised the exit permit fee.

With regard to official capital inflows in1986/87, the Government consistentlyadopted a prudent foreign borrowing policywith emphasis on concessional funds andconsidering its capacity to repay. Toaccelerate the implementation ofdevelopmental projects financed by foreignborrowings, the Government established asupervising team called the Team for theEffectiveness of the Realization ofDevelopment Projects with Foreign Funds (TimPendayagunaan Pelaksanaan Proyek-proyekPembangunan dengan Dana Luar Negeri orP4DLN). In addition, to overcome the lack ofrupiah local financing for on-goingdevelopment projects, the Government madeefforts to obtain not only higher local financingcomponents, but also special concessionalborrowings that could be converted to rupiah.To encourage private capital inflows, theGovernment continued to provide a numberof incentives.

Vll. INDONESIAVll. INDONESIAVll. INDONESIAVll. INDONESIAVll. INDONESIA’S BALANCE OF P’S BALANCE OF P’S BALANCE OF P’S BALANCE OF P’S BALANCE OF PAAAAAYMENTSYMENTSYMENTSYMENTSYMENTS

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2. Foreign exchange system and ex-2. Foreign exchange system and ex-2. Foreign exchange system and ex-2. Foreign exchange system and ex-2. Foreign exchange system and ex-change rate policychange rate policychange rate policychange rate policychange rate policy

As in the preceding years, the Governmentcontinued to implement an open foreign ex-change system in order to promote investmentactivities, domestic production, and exports.In addition, the Government aimed at main-taining a realistic rupiah exchange rate inorder to safeguard the competitiveness of In-donesian industry and to preserve public con-fidence in the rupiah, thereby impacting posi-tively on the national economy.

In order to reduce pressures on the bal-ance of payments that resulted mainly fromthe sharp drop in world oil prices, on Sep-tember 12, 1986 the Government undertooka 31% rupiah devaluation against the USdollar. This measure was taken not only toenhance the competitiveness of non-oil/gasexport commodities in world markets and tocreate a more attractive business climate forinvestors, but also to prevent capital outflows.

3. Export policy3. Export policy3. Export policy3. Export policy3. Export policy

In addition to the September 12, 1986devaluation, the Government undertook aseries of measures to promote thecompetitiveness of non-oil/gas exportcommodities in the international market.These measures included the policy packagesof May 6, and September 12, 1986 andJanuary 15, 1987 (all described above) as wellas other supporting policies which coveredtrade, taxation, and credits.

With regard to trade procedures, exportersand non-exporting producers (whose productsare to be exported according to contracts withexporters) are allowed to import raw materialswithout restriction by import licensingcontrols. To qualify for this exemption fromimport restrictions, at least 85% of the total

products are to be exported.1)

In order to promote the export of finishedproducts, in October 1986, the Governmentprohibited exports of certain raw materials suchas rattan, raw skin and hides as well as sawntimber made of ramin, white meranti andagathis wood which were not in the form ofwide boards.2)

To enhance the competitiveness of otherexports, the number of commodities subjectto quality control was extended to includeblack tea, certain types of natural rubber andcoconut oil.3) In addition, pure silver and goldwere allowed to be exported with therequirement that a quality certificate beenclosed.4)

To expedite the export of certain strategicindustrial products, the Government grantedfacilities to some strategic industrialcompanies, namely PT Industri PesawatTerbang Nusantara (PT IPTN), PT PabrikKapal Indonesia (PT PAL Indonesia), PTPindad, and Perum Dahana, to carry out theirown exports.5)

1) Minister of Trade, Minister of Finance and Governor of BankIndonesia Joint Decrees:- Nos: 135/Kpb/V/1986; 316/KMK.01/1986; and 160/M/SK/5/1986, May 6, 1986.- Nos: 184/Kpb/VI/1986; 484/KMK.01/1986; and 227/M/SK/6/1986, June 4, 1986.

2) Minister of Trade Decrees Nos: 274/Kp/X/1986, October 7,1986; 305/Kp/X/1986, October 18, 1986; and 306/Kp/X/1986, October 18,1986.

3) - Minister of Trade Decree, No. 147/Kp/V/1986, May 9,1986.- Director General of Foreign Trade Decrees Nos:2/DAGLU/Kp/IV/1986, April 17, 1986; 43/DAGLU/Kp/IV/1986, April17, 1986; and 110/DAGLU/Kp/IX/1986, September 13,1986.

4) - Minister of Trade Decree No. 229/Kp/VIII/1986, August 9,1986.- Director General of Foreign Trade Decree No. 108A/DAGLU/Kp/IX/1986, September 9, 1986.- Director General of General Mining Decree No. 632.K/2016/040000/1986 October 18, 1986.

5) - Presidential Decree No. 66/1986, December 29, 1986.

- Minister of Trade Decree No. 19/Kp/I/1987, January 23,1987.

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Meanwhile, to expedite the flow of exportsfrom bonded zones, the Governmentauthorized the bonded zones operatingagency to issue certificates of origin forproducts originating from the zones. Inaddition, the Nusantara Bonded Zone Agencywas authorized to issue a limited trade permitto companies investing their capital in thezone.6) It should also be noted that the previousstipulations on import and export activities aswell as the processing and storage facilitiesin the bonded zones remained in effect.7)

With respect to taxation, the export tax oncrude palm oil was reduced from 5% to 0%in line with the falling price of this commodityin the world market.8) Also, the export tax onnatural sand was reduced from 20% to 10%in order to promote its export.9) In addition,to encourage exports of finished products, inNovember 1986, the Government raisedexport taxes on several types of processedrattan, various types of sawn timber in the formof wide boards, leather, and tengkawangkernel, tax rates that were previously fixedbetween 0% and 20%, were raised toapproximately 5% to 30%.10) In addition, theGovernment granted facilities to exporting andnon- exporting producers, covering theexemption and drawback of import duties onimported inputs needed to produce exportproducts. 11)

In the field of credits, to encourage non-oil/gas exports, the self-financing requirement ofcompanies under PMA/Joint Ventureobtaining export credits was reduced from30% to 15% of the total financing.12) Also,provision of the export certificate facility(Sertifikat Ekspor or SE), previouslyscheduled to be revoked on April 1, 1986,was extended until June 30, 1986.

4. Import policy4. Import policy4. Import policy4. Import policy4. Import policy

In the reporting year, the Governmentintroduced an important import policy in theform of trade deregulation which alteredgradually the non-tariff system such as thesystem of licensing, quota, import restrictions,and other restrictions, into a tariff system.Accordingly, the Government intended to usetariffs as the main instrument in import policyin order to increase the transparency of thetrade system, to raise government revenuesand simplify administration, and to providemore price certainty to consumers.

As noted above, imports of goods and rawmaterials used by exporters and nonexportingproducers are not subject to import licensingcontrols, provided that the materials are usedin heavily export oriented production. Thisexemption from import licensing control alsocovers construction equipment that isimported by producers and contractorsimplementing government projects financedby foreign borrowings. It is noteworthy thatcompanies that export only part of theirproducts are required to purchase domesticmaterials as long as the prices are not higherthan those of imports. However, in casedomestic producers are not able to supplythose materials, the exporting producers areallowed to import without being subject to

6) Minister of Trade Decrees Nos: 186/Kp/VI/1986, June 4,1986; 226/Kp/VIII/1986, August 9, 1986; and 37/Kp/II/1987, February 13, 1987.

7) - Government Regulation No. 22/1986, May 6, 1986.- Minister of Trade, Minister of Finance and Governor ofBank Indonesia Joint Decrees Nos: 138/Kpb/V/1986; 319/KMK.01/1986, and 19/7/Kep/GBI, May 6, 1986.- Minister of Trade Decrees Nos: 141/Kp/V/1986, May 6,1986 and 37/Kp/II/1987, February 13, 1987.

8) Minister of Finance Decree No. 549/KMK.011/1986, June20, 1986.

9) Minister of Finance Decree no. 270/KMK.011/1986, April19, 1986.

10) Minister of Finance Decrees Nos: 910/KMK.011/1986,October 24, 1986; 937/KMK.01/1986, November 4, 1986;and 148/KMK.011/1987, March 19, 1987.

11) Government Regulation No. 21/1986, May 6, 1986.12) Bank Indonesia Circular Letter No. 19/6/UKU, Octo-

ber 25, 1986.

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import control.13) An exemption from importprocedures is also granted to certain strategicindustrial companies.14)

Other deregulation measures taken by theGovernment include the relaxation of importcontrol on 165 imported goods classified in 7manufacturing groups. This relaxation permitsthe general importers (importir umum or IU)to import those goods.15) Furthermore, the fa-cility is applied to certain goods which areclassified in the textile manufacturing group(92 items) and in the steel manufacturinggroup (11 items).16)

To encourage domestic industrialdevelopment, the Government continues toenforce import restrictions on 152 items ofthose seven manufacturing groups byappointing designated importers. Theseimporters include: approved importers(importir terdaftar or IT); producer importers(produsen importir or PI); importer producers(importir produsen or IP); and, licensed-agents (agen tunggal or AT).17) In addition,import regulations are still in effect for 386

goods of the textile manufacturing group and89 goods of the steel manufacturing group.Furthermore, batik products are subject toimport restrictions because most batikproducers operate on a small scale and areconsidered to be in need of protection.18)

In related areas, imports of reactive coloressence are still governed by importrestrictions in the form of authorized importers,while piston rings can only be imported byregistered importer producers. Moreover, theimportation of several basic materials for theproduction of plastic is subject to importrestrictions regarding volume and designatedimporters.19)

To protect domestic cotton production, theGovernment has stipulated that importers areobliged to purchase domestic cotton at aspecified ratio relative to imported cotton. Ifthere is a shortfall in domestic production,additional cotton may be imported, however,domestic purchase is required at the time ofthe subsequent harvest.20)

In the area of taxation, the Governmenthas provided facilities to enhance thecompetitiveness of non-oil/gas exportcommodities and to promote the use ofdomestic production. In this regard,facilities are provided for exemption fromor drawback of duties and additional dutieson imported goods and raw materials exceptfuels, lubricating oil and plant

13) - Minister of Finance, Minister of Trade and Governor ofBank Indonesia Joint Decrees Nos : 317/KMK.01/1986;136/Kpb/V/1986; and 19/5/Kep/GBI, May 6, 1986.- Minister of Trade, Minister of Finance and Minister ofIndustry Joint Decrees:a. Nos : 135/Kpb/V/1986; 316/KMK.01/1986; and 160/M/SK/1986, May 6, 1986, andb. Nos : 184/Kpb/V/1986; . 484/KMK.01/ 1986; and 227/M/SK/1986, June 4, 1986.

14) - Government Regulation No. 66/1986, December 29, 1986.- Minister of Trade Decree No. 19/Kp/I/1987, January 23,1987.

15) - Minister of Trade Decree No. 307/Kp/X/1986, October 25,1986.- Director General of Foreign Trade Decree No. 129/DAGLU/Kp/X/1986, October 25, 1986.

16) - Minister of Trade Decree No. 09/Kp/I/1987, January 15,1987.- Director General of Foreign Trade Decree No. 03/DAGLU/Kp/I/1987, January 15, 1987.

17) - Minister of Trade Decree No. 307/Kp/X/1986, October 25,1986.- Director General of Foreign Trade Decree No. 129/DAGLU/Kp/X/1986, October 25, 1986.

18) - Minister of Trade Decree No. 09/Kp/I/1987, January 15,1987.- Director General of Foreign Trade Decree No. 03/DAGLU/Kp/I/1987, January 15, 1987.

19) - Minister of Trade Decree No. 246/Kp/VIII/1986, August26, 1986.- Director General of Foreign Trade DecreesNos : 95/DAGLU/Kp/VII/1986, July 14, 1986 and 02/DAGLU/Kp/I/1987, January 15, 1987.

20) Minister of Trade Decree No. 18/Kp/I/1987, January 23,1987.

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equipment.21) The facilities were granted toexporting and non-exporting producers,contractors implementing government projectsfinanced by foreign borrowings, and investorsunder PMA and PMDN schemes. In line withthese facilities, the Government establishedthe center for management of import taxexemptions and drawbacks (PusatPengolahan Pembebasan dan PengembalianBea Masuk or P4BM) to administer thisprogram.22)

To promote the competitiveness ofmanufactured goods in the domestic market,the Government expanded the range ofimported goods whose tariffs were reduced.Meanwhile, in order to protect domesticindustries, in the reporting year theGovernment also raised the duties andestablished additional duties on certainimported goods.23)

Other taxation policies established in thereporting year were improvements to thesystem of value added tax (VAT) on importedgoods. VAT on certain imported goods, such

as, livestock food and basic materials forlivestock food, text books, and medicalequipments, were borne by the Government.Facilities to suspend VAT payments were alsogranted to exporting producers, PT Inalum,and service companies under PMA andPMDN schemes.24) In addition, certainstrategic industries were exempted fromimport duties, VAT, and sales tax on luxuriousgoods.25)

5. Policy on services5. Policy on services5. Policy on services5. Policy on services5. Policy on services

As in preceding years, the policy onservices taken in the reporting year was aimedat improving foreign exchange earnings andincreasing the effectiveness of foreignexchange in productive purposes. To supportthe development of tourism as a source offoreign exchange, the Government eased visaregulations and expanded the network ofinternational flights.

In the reporting year, improvements invisa regulations covered visa-free entry forthe citizens of Taiwan and Malta, and forforeign businessmen. There were alsochanges in visa regulations regardingbusiness visits and for citizens of HongKong.26) The international flight network wasexpanded with the opening of new routesfrom Jakarta to Los Angeles via Denpasar,Biak and Honolulu, from Kupang to Darwin,

21) - Government Regulation No. 21/1986, May 6, 1986.- Minister of Finance, Minister of Trade and Governor ofBank Indonesia Joint Decrees:a. Nos: 314/KMK.01/1986; 133/Kpb/V/1986, and 19/3/Kep/GBI;b. Nos: 315/KMK.01/1986; 134/Kpb/V/1986, and 19/4/Kep/GBI;c. Nos: 317/KMK.01/1986; 136/Kpb/V/1986, and 19/5/Kep/GBI; andd. Nos: 318/KMK.01/1986; 137/Kpb/V/1986, and 19/6/Kep/GBI; May 6, 1986.

22) Minister of Finance Decrees Nos: 324/KMK.01/1986, May6, 1986; 816/KMK.01/1986, September 19, 1986; and1003/KMK.01/1986, November 26, 1986.

23) - Government Regulation No. 47/1986, October 25, 1986.- Minister of Finance Decrees:No. 632/KMK.01/1986, July 28, 1986;No. 660/KMK.05/1986, August 12, 1986;No. 748/KMK.01/1986, August 13, 1986;No. 915/KMK.05/1986, October 25, 1986;No. 1080/KMK.01/1986, December 31, 1986;No. 20/KMK.05/1987, January 15, 1987;No. 23/KMK.05/1987, January 15, 1987;No. 70/KMK.05/1987, February 3, 1987; andNo. 71/KMK.05/1987, February 3, 1987.

24) Minister of Finance Decrees Nos. 485/KMK.01/1986, June4, 1986; 564/KMK.04/1986, June 30, 1986; and 325/KMK.01/1986, May 6, 1986.

25) - Presidential Decree No. 18/1986, May 9, 1986.- Minister of Finance Decrees Nos. 558/KMK.04/1986, June24, 1986 and 596/KMK.05/1986, July 11, 1986.

26) - Minister of Justice Decrees Nos. M.04-lZ.01.02, 1986,November 4, 1986; M.05-lZ.01.02, 1986, December 1,1986;M.02-lZ.01.02, 1986, August 1, 1986; and M.03-lZ.01.03,1986, October 30, 1986.- Minister of Justice and Minister of Tourism, Post and Tele-communication Joint Decrees Nos. M.02-lZ.03.01,1986 andKM.40/HM.702/MPPT-86, July 19, 1986.

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and from Pontianak to Kuching. In addition,two airports and a seaport were establishedas main gates for foreign tourists, namelythe Pontianak and Kupang airports aswell-as the seaport of Semarang.27)

To economize foreign exchange and to uti-lize funds for more productive purposes, inthe reporting year the Government raised theexit permit fee from Rp 150 thousand toRp 250 thousand for each person per trip.28)

6. Policy on capital flows6. Policy on capital flows6. Policy on capital flows6. Policy on capital flows6. Policy on capital flows

In the reporting year, policy regardingcapital flows covering government foreignborrowings and private capital emphasizedefforts to utilize the capital more efficientlyand to enhance government capital inflows.In the field of government foreign borrowings,efforts were made to accelerate the utilizationof funds originating from abroad and to obtainborrowings with higher local financingcomponents and special concessionalborrowings that could be converted intorupiah. Also, the Government continued topursue a prudent borrowing policy by givingpriority to untied concessionary loans, byavoiding dependency on foreign countries,and by limiting the future burden on thebalance of payments while utilizing the loansin line with the development plan.

To smooth the implementation ofdevelopment projects and in line with theefforts to speed up the utilization of funds fromabroad, the Government established theP4DLN team.30)

In addition, the Government improvedthe disbursement and administration pro-cedures associated with foreign loans andgrants.30)

In the field of private capital flows, theGovernment undertook a series of measuresaimed at promoting investment activities. Inan effort to create a more attractive businessclimate for foreign investors, the Governmentpermitted PMA companies to extend theiroperations for 30 years after expansionapproval. (Previously, PMA companies hadbeen permitted to operate for 30 yearscommencing from their establishment).31) Toencourage the holding of national equity andto promote the development of capital market,companies under the PMA scheme thatfulfilled certain requirements were eligible fortreatment equivalent to those under the PMDNscheme.32) This allowed PMA companies tomarket their products domestically and toobtain working capital credit from commercialstate banks and Indonesia’s DevelopmentBank (Bank Pembangunan Indonesia orBapindo).33)

Furthermore, PMA companies exporting allof their products or located in remote areas,or facing a high business risk, or investing atleast $ 10 million, were allowed to beestablished with 95% of their shares held byforeign partners. However, after 5 years ofcommercial operation, the national sharesshould be increased to at least 20%. Inaddition, to encourage PMA companies toreinvest their profits in Indonesia, PMAcompanies were allowed to purchase sharesof existing PMA, PMDN and non PMA/PMDN

27) Presidential Decree No. 39/1986, August 28, 1986.28) Minister of Finance Decree No.828/KMK.04/1986, October

2, 1986.29) Presidential Decree No. 32/1986, July 29, 1986.30) Minister of Finance and Minister of National Development

Planning/Chairman of Bappenas Joint Decrees Nos. 48/KMK.012/1987 and KEP.004/Ket/l/1987, January 27,1987.

31) Government Regulation No. 24/1986, May 6, 1986.32) Presidential Decree No. 17/1986, May 6, 1986.33) - Minister of Trade Decree No. 185/Kp/VI/1986, June 4,

1986.- Decree of Board of Directors of Bank Indonesia No. 19/15/Kep/Dir, June 4, 1986.

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companies.34)

To strengthen the condition of PMDNcompanies that need additional capital, in thereporting year the Government permittedforeign investors to invest their capital in suchPMDN companies. In order to encourageexports, foreign partners of PMA companieswere allowed to increase their share to 95%in those cases where domestic partners werenot able to provide their portion. However,within 5 years, the ratio of domestic to foreignshares must return to its previous position.35)

To encourage foreign capital inflows, theGovernment revoked the ceiling on reswapfacility to Bank Indonesia and adjusted thepremium of swaps and reswaps. The premiumrate on swaps charged by banks/NBFIs to theircustomers was left to each bank’s/NBFI’sdiscretion. However, the reswap premium toBank Indonesia was set equal to the swappremium minus a certain percentage with aminimum of 8.0%.36)

In order to provide greater opportunities toPMA companies, the Government improvedthe investment priority list (Daftar SkalaPrioritas or DSP) of 1986. This improvement,provided for among other things, a widersector to be open to PMA companies. Inaddition, PMA companies were allowed toinvest their capital in sectors that were openfor PMDN companies as long as they involvedcooperative entities.37)

To encourage foreign capital inflows, theGovernment supported efforts to establish

the Multilateral Investment GuaranteeAgency (MIGA). The main purpose of MIGAis to guarantee non-commercial risk to in-vestors from member countries investingtheir capital in other member countries.38)

B. Balance of Payments DevelopmentsB. Balance of Payments DevelopmentsB. Balance of Payments DevelopmentsB. Balance of Payments DevelopmentsB. Balance of Payments Developments

1. General1. General1. General1. General1. General

The heavy pressures on the balance of pay-ments that occurred in 1985/86 and persistedin the reporting year were mainly as a conse-quence of the collapse of world oil prices.However, due to a series of fundamental mea-sures taken by the Government, accompaniedby improvement in the world oil prices in thesecond semester of 1986/87, a substantial cur-rent account deficit was avoided.

In the reporting year, the current accountdeficit increased to $ 4,051 million from$ 1,832 million in the preceding year. Tak-ing into account the net capital flows out-side the monetary sector, the overallIndonesia’s balance of payments recordeda deficit of $ 738 million (Table 7.1).

2. Current account2. Current account2. Current account2. Current account2. Current account

In the reporting year, the current accountdeficit widened substantially from $ 1,832million to $ 4,051 million, owing mainly to asharp decline in oil/LNG exports of$ 5,471 million; non-oil/LNG exports in-creased by $ 556 million and imports of goodsand services declined by $ 2,696 million.

2.1. Exports2.1. Exports2.1. Exports2.1. Exports2.1. Exports

In 1986/87, total exports declined by26.4% to $ 13,697 million, mainly due to asharp decline in oil/LNG exports of 44.0% to

34) - Presidential Decree No. 22/1986, May 31, 1986.- Chairman of National Coordinating Agency for CapitalInvestment Decree No. 12/SK/1986, June 4, 1986.

35) Chairman of National Coordinating Agency for CapitalInvestment Decree No. 17/SK/1986, October 25, 1986.

36) Decree of Board of Directors of Bank Indonesia No. 19/45/Kep/Dir, October 25, 1986.

37) Presidential Decree No. 22/1986, May 31, 1986. 38) Presidential Decree No. 31/1986, July 18, 1986.

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$ 6,966 million, which was brought about bya drop in oil and LNG export values of 45.6%and 40.1%, respectively. On the other hand,non-oil/LNG exports went up by 9.0%reaching $ 6,731 million, reflecting increasesin several major export commodities. As aresult of these developments, the share of oil/LNG exports in total exports continued todecline to 50.9% in 1986/87 from 66.8% theyear before.

By country of destination, Japan and theUnited States were still the major buyers ofIndonesia’s export commodities, having sharesof 43.5% and 20.3% of the total exports,respectively. The share of exports to ASEANcountries stood at 9.8% compared with 10.0%in the preceding year; Singapore still held firstplace (82.7%), followed by the Philippines(6.5%), Malaysia (6.3%), and Thailand (4.5%)(Table VIII).

2.1.a. Oil/LNG exports2.1.a. Oil/LNG exports2.1.a. Oil/LNG exports2.1.a. Oil/LNG exports2.1.a. Oil/LNG exports

Following the last quarter of 1985/86 de-cline in prices, in August 1986 world oilprices unexpectedly dropped below $ 10 perbarrel — to their lowest level in the last 10years — owing to a glut in world markets.During the second half of 1986/87, world oilprices have recovered somewhat, but by theend of the year they remained well below theaverage price recorded in 1985/86.

In an effort to raise prices, OPEC held ameeting in Geneva in December 1986 whenit was agreed to reduce production quotas andto establish new official prices, effectiveFebruary 1987. The OPEC production quotawas set at 15.8 million barrel per day (mbd),implying a decline of 2.3 million barrel (12.6%)from average OPEC production in 1986. Thisquota was effective until June 1987; thequotas for the third and the fourth quarter of1987 were set at 16.2 mbd and 17.5 mbd,

respectively. In the meantime, the ArabianLight Crude (ALC) official price was setat $ 18.00 per barrel.

In line with the result of the December 1986OPEC meeting, Indonesia’s production quota,which covered the period February until June1987, was fixed at 1.133 mbd, a reduction of60 thousand barrel per day. Production quotasfor the third and fourth quarter of 1987 wereset at 1.193 mbd and 1.312 mbd, respectively.In addition, in February 1987, the price ofMinas crude oil was fixed at $ 17.56 per barrel.

In 1986/87, the value of oil/LNG exportsdecreased substantially (by 44.0%) to$ 6,966 million, mainly owing to a decline inthe average oil export price of 52.5%to $ 12.50 per barrel. The value of oilexports declined by 45.6% to $ 4,798 million.The volume of oil exports increased by 13.4%reaching 383.6 million barrel as aconsequence of an increase in oil productionwhich was largely the result of a temporaryeasing of production quota control at theOPEC meeting in December 1985.

In the reporting year, the value of LNGexports also declined sharply, by 40.1%to $ 2,168 million. This decline was due to afall in the average LNG export price of 41.5%to $ 2.73 per MMBTU which followed thefalling world oil price. The volume of LNGexported in 1986/87 rose by 2.2% to 793million MMBTUs, owing to the expansion ofexport markets to the Republic of Korea inthe last quarter of the reporting year.

2.1.b. Non-oil/LNG exports2.1.b. Non-oil/LNG exports2.1.b. Non-oil/LNG exports2.1.b. Non-oil/LNG exports2.1.b. Non-oil/LNG exports

This sharp decline in oil/LNG exports hasincreased the importance of non-oil/LNGexports. However, expansion of non-oil/LNGexports were still hindered by persistentprotection imposed by several industrial

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countries and by weakening internationalprices of several major non-oil/LNG exportcommodities. In these circumstances, theGovernment undertook a series of policymeasures in the areas of trade, taxation, andexport quality control in order to enhancethe competitiveness of non-oil/LNG exportcommodities. As a result of these efforts, in1986/87, the value of non-oil/LNG exports in-creased by 9.0% reaching $ 6,731 million,mainly reflecting a substantial increase in theexport volume of several commodities.

As in preceding years, the major marketsfor Indonesia’s non-oil/LNG exportcommodities in 1986/87 were the UnitedStates and Japan whose shares increasedfrom 19.4% and 17.0% to 21.1% and19.3%, respectively.

TTTTTimberimberimberimberimber

In the reporting year, timber still occupiedfirst place among the non-oil/LNG exportcommodities; its share in the total non-oil/LNG exports increased from 19.5% to 23.1%.Timber exports, mostly in the forms of plywoodand sawn timber, rose by 29.0% reaching$ 1,556 million, due mainly to the increasein plywood exports of 31.7% to $ 1,108million; volume and price increased by 15.4%and 14.1%, respectively. The sawn timberexports also increased by 19.9% to $ 415

million, resulting from increases in both priceand volume, of 12.7% and 5.8%, respectively.

By country of destination, the UnitedStates (19.3%) and Japan (17.2%)continued to constitute the largest marketfor Indonesia’s timber exports. Japan, whichinitially held third position, advanced tosecond place replacing Hong Kong, whichdropped back to the third position (11.6%).Other major timber export markets wereSingapore (10.4%), Taiwan (7.4%), and theUnited Kingdom (5.9%). It is noteworthy thatthe share of timber exports to Saudi Arabiaand the People’s Republic of China (PRC)increased, namely from 4.4% and 1.4% to5.1% and 4.6%, respectively.

Cof feeCof feeCof feeCof feeCof fee

In the reporting year, the share of coffee inthe total non-oil/LNG exports increased from10.6% to 11.9% so that coffee came to holdsecond position among Indonesia’s non-oil/LNG exports, replacing rubber. Indonesia’scoffee exports increased by 22.4% reaching$ 803 million, brought about by an increasein both price and volume of exports, by 14.9%and 6.5%, respectively. This price increasewas closely associated with the decliningworld coffee supply, mainly as a consequenceof the failure of Brazil’s coffee production torecover following the long drought in 1985.The increased volume of coffee exports wasrelated to an increase in Indonesia’s coffeeproduction following the suspension of exportquotas imposed by International CoffeeOrganization (ICO).

By country of destination, the UnitedStates remained the largest buyer ofIndonesia’s coffee with a share of 19.7%.Other major buyers were the Netherlandsand the Federal Republic of Germany withshares of 17.7% and 9.1%, respectively.

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TTTTTexti lesexti lesexti lesexti lesexti les

In the reporting year, the share of textilesin total non-oil/LNG exports increased from9.2% to 11.1%. Textile exports recorded aconsiderable increase of 31.3% (reaching$ 750 million) due to a rise in both price andvolume. The increase in volume was broughtabout by a rise in production occasioned byless restrictive export quotas to the UnitedStates. It should be noted that by the end ofthe reporting year, the export volume to theUnited States had almost filled its quota, whichwill expire in July 1987.

By country of destination, the United Statesremained the largest buyer of Indonesia’stextiles with a share of 53.7%, followed bySingapore (6.4%), the Netherlands (4.0%), theFederal Republic of Germany (3.9%), Japan(3.9%), and Hong Kong (3.0%).

RubberRubberRubberRubberRubber

In the reporting year, the share of rubber intotal non-oil/LNG exports declined from11.5% to 10.8% and its position among thenon-oil/LNG export commodities shifted fromsecond to fourth. Rubber exports increasedby only 3.0% (to $ 730 million) as a result ofa rise in the unit price of Indonesian rubberof 4.2%; volume decreased by 1.2%, owingto lower demand for natural rubber in theworld market. The decrease in demand fornatural rubber resulted from an increase inits price relative to synthetic alternative, whichbenefited from the sharp drop in world oilprices.

By country of destination, the United Statesremained the largest market for Indonesia’srubber with a share of 46.0%. Other majorbuyers were Singapore (19.8%), the SovietUnion (5.6%), Canada (4.2%), the FederalRepublic of Germany (3.1% ), and Japan (3.1%).

Shr impShr impShr impShr impShr imp

In the reporting year, the share of shrimpin total non-oil/LNG exports increased from3.7% to 4.5%. The value of shrimp exportsrose by 35.0% to $ 305 million, attributableto increases in price (of 23.0% reaching$ 5,350 per ton) and in the volume (of 9.6%to 57 thousand tons). It is worth noting thatthe increase in volume was brought aboutby extensification of shrimpponds under thesmallholders’ nucleus shrimppondcultivation scheme (Tambak Inti Rakyat orTIR program), and the provision of businesslicenses to largescale cultivation operatedby PMA/PMDN companies.

The largest market for shrimp exports wasJapan (82.9%), while the other importantmarkets were Singapore (5.0%), Hong Kong(2.9%), the Netherlands (2.6%), and theUnited States (1.6%).

AluminumAluminumAluminumAluminumAluminum

In the reporting year, the share of aluminumin total non-oil/LNG exports recorded a slightdecline from 3.6% to 3.2%. Aluminumexports declined by 4.0%, reaching$ 214 million due to a decline in exportvolume of 13.2%, which was partly offset by aprice increase of 10.5%.

By country of destination, Japan remainedthe largest buyer of Indonesia’s aluminumexports (87.5%), while the other majorbuyer was the Netherlands (4.7%).

TTTTTininininin

In the reporting year, the share of tin in totalnon-oil/LNG exports declined to 2.3%compared with 4.0% in the preceding year.Tin exports recorded a significant decreaseof 37.1% to $ 156 million although volume

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increased by 4.3% to 24 thousand tons, anamount equal to the quota set by theAssociation of Tin Producing Countries (ATPC);the price of tin exports fell by about 40%.This price fall stemmed from inactivating ofthe International Tin Council (ITC) inmanaging the bufferstock operation, whichcaused a tin surplus of 82 thousand tons inthe world market. To prevent furtherdeterioration in tin prices, the ATPC imposedquotas on production and exports of membercountries and persuaded the nonATPCcountries (including Brazil and the PRC) tosupport this effort.

By country of destination, Singapore, theNetherlands, and Italy remained the largestbuyers of Indonesia’s tin exports; theirshares were 69.8%, 16.8%, and 4.9%,respectively.

Urea fertilizerUrea fertilizerUrea fertilizerUrea fertilizerUrea fertilizer

In the reporting year, urea fertilizerexports increased by 11.1% to $ 120million, owing to an increase in volume of38.196, while price decreased by 19.4%.The decrease in price was caused by pricecompetition from other major producingcountries, such as Saudi Arabia, Kuwait,and Qatar. The share of urea fertilizer in thetotal non-oil/LNG exports recorded a slightincrease from 1.7% to 1.8%.

The major buyers of the Indonesia’s ureafertilizer were the PRC (25.4%), Thailand(14.7%), the Philippines (11.9%), and India(8.7%).

Palm oilPalm oilPalm oilPalm oilPalm oil

In the reporting year, palm oil exportsdeclined sharply by 32.4% reaching $ 115million, due mainly to a fall in price of48.4%; volume increased by 31.3%

reaching 662 thousand tons. The drop inpalm oil prices in the world market resultedfrom decreased consumption in theindustrial countries — which was closelyassociated with the increasing consumptionof soybean oil and other vegetable oils—and from increased supply from the majorworld producer (Malaysia) in the firstsemester of this reporting year. Measuredin terms of value, the share of palm oil inthe non-oil/LNG exports declined to 1.7%compared with 2.8% in the preceding year.The largest markets for palm oil were theNetherlands (37.6%), the United Kingdom(11.2%), the Federal Republic of Germany(12.8%), and Italy (10.0%).

TTTTTe ae ae ae ae a

In the reporting year, tea exports declinedby 20.9% to $ 106 million, due to a declinein volume of 8.8% to 93 thousand tons, whichwas a consequence of an increase in domesticconsumption. Also, price decreased by12.5%, owing to decline in world teaconsumption. The share of tea in total non-oil/LNG exports decreased to 1.6% comparedwith that of 2.2% in the preceding year.

The major export destinations were theUnited States (17.3%) and the UnitedKingdom (14.9%). Other tea export marketsincluded Pakistan (10.4%), Australia (9.2%),Jordan (8.6%), and the Netherlands (8.0%).

Other major export commoditiesOther major export commoditiesOther major export commoditiesOther major export commoditiesOther major export commodities

In the reporting year, other major exportcommodities comprised foodstuffs, pepper,tobacco, rattan, handicrafts, cement, copper,and nickel. Total exports of these eightcommodities rose by 6.4% (to $ 914 million)with major increases occurring in cement(82.6%), pepper (69.5%), tobacco (21.8%),copper (16.5%), and rattan (12.5%).

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Increases in the exports of tobacco, rattan,and cement were attributable to increases involume, namely by 33.3%, 17.4%, and87.2%, while prices declined by 7.8%, 4.3%,and 2.5%, respectively. The increase incopper exports was due to increases in bothvolume and price of 7.2% and 8.7%,respectively. As a consequence of a reductionin world pepper supply, price increased by36.8%, whereas volume rose by 24.0%.

Among those eight commodities, decreaseswere recorded in export value of foodstuffs(8.6%), handicrafts (17.8%), and nickel(13.7%). The decline in foodstuff andhandicrafts exports stemmed from declines involumes of 22.5% and 54.4%, respectively;the decline in nickel exports was caused by adecline in its average price of 41.0%.

2.2. Imports2.2. Imports2.2. Imports2.2. Imports2.2. Imports

The continued sluggishness in economicactivity, the impact of tight fiscal policy, andthe September 1986 devaluation constitutedthe major factors that led to a decline of 8.8%(to $ 11,451 million) in the value of totalimports in 1986/87. As in the last three years,declines were recorded both in imports of oil/LNG and non-oil/LNG companies, namely15.3% and 7.2% to $ 2,095 million and$ 9,356 million, respectively (Table 7.7).

The decline in the value of imports by oil/LNG companies was mainly caused by asignificant decline in imports by oilcompanies, i.e., 16.4% to $ 1,908 million.This decline was mainly attributable to adecline in Arabian Light Crude (ALC) importsof 43.7% to $ 385 million, which was closelyassociated with the fall in world oil prices.Imports by LNG companies recorded a slightdecline of 2.6% to $ 187 million.

A decline in imports of non-oil/LNG

companies was recorded by purchasesfinanced through the general foreignexchange, foreign aid, and private capitalinflows. General foreign exchange importsdecreased by 4.6% to $ 6,336 million, owingto declines in both program and generalimports of 9.0% and 4.4% (to $ 183 millionand $ 6,153 million) respectively. It shouldbe noted that in order to satisfy domesticdemand, sugar, which had not been importedfor the last two years, was imported again in1986/87 at a value of $ 33 million.

Imports financed by foreign aid declinedby 9.3% to $ 2,501 million as a conse-quence of a reduction in project aid importsby 9.7% (to $ 2,453 million). The declinein project aid imports was closely related tothe austerity policy in financing governmentprojects. During the reporting year, food aidprogram imports under PL-480 increasedby 26.3% to $ 48 million.

Imports by PMA, state, and privatecompanies financed under foreign capitalinflows also declined, by 23.9% to $ 519million. This was due to declines in importsby PMA companies of 8.4%, and importsby state and other private enterprises of31.6%, to $ 208 million and $ 311 million,respectively.

Classified by economic category, the de-velopments in imports were characterizedby the large share of raw material imports,which reached 58.8% of the total imports.Meanwhile, the capital and consumptiongoods had shares of 23.8% and 17.4%,respectively (Table 7.8).

By country of origin, the largest portionof imports still originated from Asia, followedby Europe and the United States. Importsfrom Asia reached 56.9% of the total im-ports, mainly from Japan and other Asean

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countries. The share of the European coun-tries in total imports increased to 21.1%,whereas that of North American countriesdeclined to 16.9%. Among the industrialcountries, Japan and the United States stillhad the largest shares, i.e., 28.2% and13.3% of total imports.

In the reporting year, the share of importsfrom ASEAN countries registered asignificant increase, namely from 7.7% to13.4%. Of the ASEAN countries, Singaporehad the largest share in Indonesia’s imports(87.5%), which was up slightly from thepreceding year (87.1%). The share ofimports from the Philippines also slightlyincreased to 3.9%, whereas imports fromThailand and Malaysia recorded smalldecreases to 4.8% and 3.8%, respectively.

2.3. Services account2.3. Services account2.3. Services account2.3. Services account2.3. Services account

In contrast to the preceding year, the defi-cit on services account narrowed signifi-cantly from $ 7,892 million to $ 6,297 mil-lion. There was a decline in services trans-actions of both oil/LNG and non-oil/LNGcompanies. As regards the oil/LNG account,the services transactions of both oil and LNGcompanies declined by 42.1% and 37.2%to $ 1,464 million and $ 823 million, re-spectively (Table 7.9). The lower servicespayments of oil companies was not only at-tributable to the lower outlays by Pertamina,but also to the lower services payments toforeign contractors stemming from reducedoil exports. The lower services payments ofLNG companies were also affected by thelower services outlays to contractors.

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In the reporting year, services paymentsof non-oil/LNG companies declined slightlyby 1.0% to $ 4,010 million. As in thepreceding year, services payments forfreight on imports decreased somewhat, dueto a decline in imports. In the meantime,payments on investment income continuedto increase, mainly attributable to higherinterest payments on growing governmentdebt, which increased by 24.2% to $ 2,032million. It should be noted that higherinterest payments also resulted from thedepreciation of US dollar.

The services account on travel, whichnormally shows a deficit, for the first timeshowed higher receipts over the outlays inthe reporting year. This resulted from higherforeign exchange earnings from tourism,which increased by 25.0% reaching $ 691million. It should be noted that remittancesfrom Indonesian laborers overseas, espe-cially in Saudi Arabia, increased by 17.2%reaching $ 75 million.

3. Capital movements of the non-3. Capital movements of the non-3. Capital movements of the non-3. Capital movements of the non-3. Capital movements of the non-monetary sectormonetary sectormonetary sectormonetary sectormonetary sector

In 1986/87, the net official capital inflowsof the non-monetary sector increased from$ 1,788 million to $ 3,343 million, whileinflows of private capital increased from$ 572 million to $ 1,232 million. Accord-ingly, net inflows of the non-monetary sec-tor increased by 93.9% to $ 4,575 million.

3.1. Official capital movements3.1. Official capital movements3.1. Official capital movements3.1. Official capital movements3.1. Official capital movements

In 1986/87, the official capital inflowsregistered a significant increase of 59.4% to$ 5,472 million. At the same time, paymentsfor amortization of the government debtsincreased by 29.5% to $ 2,129 million. Hence,the net official capital inflows reached $ 3,343million, an increase of 87.0%.

3.1.a. Loans and external assistance3.1.a. Loans and external assistance3.1.a. Loans and external assistance3.1.a. Loans and external assistance3.1.a. Loans and external assistance

In the reporting year, the official capitalinflows in the form of borrowings and grantsreceived from the IGGI member increased by26.3% to $ 3,475 million. In addition, thenon-lGGI loans, comprising soft loans andcommercial loans, increased significantly by193.2% to $ 1,997 million. This increasewas mainly due to disbursements of aspecial loan from the Exim Bank of Japanamounting to $ 503 million, supplementaryfunds to finance the World Bank projectsand increased disbursements of commercialloans amounting to $ 877 million (Table7.10). It should be noted that thecommercial loans were utilized to financedevelopment projects.

Classified in terms of conditions, foreignloans under the category of concessionalborrowings (Official Development Assis-tance or ODA) increased by 80.5% to$ 2,558 million, whereas those undernon-ODA increased by 44.6% to $ 2,914million. It is noteworthy that the largest por-tion of the ODA loans and grants originatedwith IGGI members in the form of projectaid (97.6%) with the remainder in the formof program aid. Official inflows in the formof grants amounted to $ 115 million.

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3.1.b. Debt repayments3.1.b. Debt repayments3.1.b. Debt repayments3.1.b. Debt repayments3.1.b. Debt repayments

Amortization of official foreign borrowingsin 1986/87 increased by 29.5% to $ 2,129million. Taking into account interestpayments in the same period, the total debtservice payments of government foreigndebt in the reporting year increased by26.9% to $ 4,149 million. The higherburden of these payments was due to anincrease in interest payments, largeramortization payments, and thedepreciation of the US dollar against severalother major currencies.

It should be noted that Debt Service Ratio

(DSR), defined as the ratio of principal andinterest payments of official debts to grossexport receipts, increased to 27.4% from16.4% in the preceding year. This increasewas due to the lower export receipts as aconsequence of the falling oil prices in theworld market.

3.1.c. Disbursed and outstanding3.1.c. Disbursed and outstanding3.1.c. Disbursed and outstanding3.1.c. Disbursed and outstanding3.1.c. Disbursed and outstandingexternal borrowingsexternal borrowingsexternal borrowingsexternal borrowingsexternal borrowings

At the end of March 1987, totaloutstanding external government debtincreased by 21.3% to $ 33,168 million, ofwhich 60.6% was denominated in non-USdollar currencies (Table 7.11).

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With respect to the source of credits, thelargest portion of new government debt(70.2%) originated with IGGI with the remain-der coming from the non-lGGI sources. TheIGGI borrowings comprised bilateral arrange-ments (73.4%) and multilateral arrangements(26.6%), the great majority of which originatedwith the International Bank for Reconstruc-tion and Development (IBRD) and the AsianDevelopment Bank (ADB). The largest por-tion of non-lGGI borrowings (78.5%) was ob-tained from international commercial banksand foreign creditors, while the remainder wasobtained through bilateral arrangements.

Classified in terms of conditions, IGGIborrowings under ODA and non-ODA termsamounted to $ 13,037 million and $ 9,202million, respectively. Non-lGGI borrowingsunder ODA and non-ODA terms amountedto $ 2,029 million and $ 7,424 million,respectively. Accordingly, the total new officialborrowings under ODA terms amounted to$ 15,066 million and non-ODA termsamounted to $ 16,626 million. It should benoted that foreign borrowings of state-owned

enterprises at the end of the reporting yearstood at $ 1,053 million.

3.2. Private capital movements3.2. Private capital movements3.2. Private capital movements3.2. Private capital movements3.2. Private capital movements

In the reporting year, net inflows of privatecapital, comprising capital inflows ofgovernment entities, PMA companies, andother private enterprises, increased by115.4% to $ 1,232 million. This rise wasprimarily due to an increase in net capitalinflows of government entities which wasclosely associated with the expansion of LNGand LPG projects as well as shortterm capitalinflows regarding the transactions in oilexports. Net capital inflows of privateenterprises, including PMA companies,decreased by 26.2% to $ 369 million.

4. Monetary movements4. Monetary movements4. Monetary movements4. Monetary movements4. Monetary movements

Official foreign exchange reservesdecreased to $ 5,103 million at the end ofMarch 1987, the equivalent of 5.9 monthsof non-oil/LNG imports. Taking into accountforeign exchange reserves held by foreign

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exchange banks, which in the reporting yeardeclined by $ 1,364 million to $ 4,027million, national foreign exchange reservesamounted to $ 9,130 million at the end ofMarch 1987, an amount adequate to financenon-oil/LNG imports for 10.6 months.

5. Exchange rate developments5. Exchange rate developments5. Exchange rate developments5. Exchange rate developments5. Exchange rate developments

During the period from the end of March,1986 to just before the devaluation ofSeptember 12, 1986, the rupiah exchangerate had declined by 0.8% against the USdollar, by 13.8% against the Japanese yen,by 11.2% against the German mark, by10.9% against the Netherlands guilder, by5.5% against the French franc, by 0.5%

against the Singapore dollar, and by 0.3%against the British pound sterling. Bycontrast, the rupiah appreciated by 14.3%against the Australian dollar.

In an effort to enhance thecompetitiveness of traded goods and toprevent the negative effects of the collapseof world oil prices on the Indonesia’sbalance of payments, the Governmentdevalued the rupiah by 31% against the USdollar on September 12, 1986, that is, fromRp 1,134.00 to Rp 1,644.00 per $ 1.00.

The value of the rupiah against the USdollar remained unchanged from September13, 1986 to the end of March 1987. During

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this period, the rupiah depreciated by 6.1%against the Japanese yen, by 12.4% againstthe German mark, by 11.3% against theAustralian dollar, by 10.8% against theFrench franc, by 8.4% against the Britishpound sterling, by 2.3% against theSingapore dollar, and by 2.2% against theNetherlands guilder.

C. Indonesia’C. Indonesia’C. Indonesia’C. Indonesia’C. Indonesia’s Balance of Paymentss Balance of Paymentss Balance of Paymentss Balance of Paymentss Balance of PaymentsProspects for 1987/88Prospects for 1987/88Prospects for 1987/88Prospects for 1987/88Prospects for 1987/88

On the basis of an assumption that theimprovement in the world oil prices that hasoccurred since January 1987 will continueto prevail, Indonesia’s balance of paymentsis projected to improve significantly in1987/88. Also, earnings from LNG exportsare expected to increase due to the increasein LNG price and due to the expansion ofLNG market to the Republic of Korea.

Furthermore, despite slower growth inindustrial countries in 1987/88, non-oil/gasexports are also expected to increasesubstantially owing to the positive impactsof the series of policy measures noted earlierto promote economic efficiency and toenhance the competitiveness of non-oil/gasexport commodities.

Moreover, non-oil/gas imports in 1987/88are estimated to increase only slightly, basedupon the improved prospects for the

Indonesian economy and the impact ofimport policies taken by the Governmentin 1986/87. These policies reduced oreliminated duties on certain import goodsand simplified the import procedures ofcertain manufacturing inputs.

The deficit on services account of thenon-oil/gas sector is expected to widensomewhat as a consequence of higher interestpayments on government debts and freighton imports.

On the basis of a substantial expansion inmerchandise exports, weak growth in imports,and a moderate widening of the deficit onservices, the current account, deficit isprojected to narrow significantly in 1987/88.

Net capital inflows are projected to belower in 1987/88 than in the preceding year.This decline is due primarily to higheramortization payments on government debtand lower disbursements of commercialborrowings.

Although the net capital inflows areexpected to be lower in 1987/88 than inthe previous year, the surplus in the capitalaccount is estimated to be much higher thanthe deficit in current account. Therefore,Indonesia’s overall balance is expected torecord a considerable surplus next yearcompared with a deficit in 1987/88.

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PERSENTPERSENTPERSENTPERSENTPERSENTAGE OF EXPORAGE OF EXPORAGE OF EXPORAGE OF EXPORAGE OF EXPORTS BY COUNTRTS BY COUNTRTS BY COUNTRTS BY COUNTRTS BY COUNTRY OF DESTINAY OF DESTINAY OF DESTINAY OF DESTINAY OF DESTINATIONTIONTIONTIONTION

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PERSENTPERSENTPERSENTPERSENTPERSENTAGE OF IMPORS BY COUNTRAGE OF IMPORS BY COUNTRAGE OF IMPORS BY COUNTRAGE OF IMPORS BY COUNTRAGE OF IMPORS BY COUNTRY OF ORIGINY OF ORIGINY OF ORIGINY OF ORIGINY OF ORIGIN

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UNIT PRICES OF SELECTED EXPORT COMMODITIESUNIT PRICES OF SELECTED EXPORT COMMODITIESUNIT PRICES OF SELECTED EXPORT COMMODITIESUNIT PRICES OF SELECTED EXPORT COMMODITIESUNIT PRICES OF SELECTED EXPORT COMMODITIES

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FOREIGN TRADEFOREIGN TRADEFOREIGN TRADEFOREIGN TRADEFOREIGN TRADE

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A. National ProductA. National ProductA. National ProductA. National ProductA. National Product

In 1986, the Indonesian economy facedsevere challenges as a consequence of asharp decline in world oil prices, slowerworld economic growth, and sluggishnessin domestic demand. However, due to aseries of fundamental adjustment measurestaken by the Government, in 1986 theIndonesian economy achieved highergrowth than in the preceding year. Measuredfrom the side of production, this highergrowth was mainly attributable to the miningand quarrying sector; as measured byexpenditure, this increase was mainlyaccounted for by the volume of exports ofgoods and services.

Output of the Indonesian economy in1986, measured by gross domestic product(GDP) at 1983 constant prices, rose by 3.2%compared with 2.3% in the preceding year(Table 8.2). Taking into account the populationgrowth rate of 2.1%, real GDP per capita in 1986grew by 1.1% compared with 0.2% in thepreceding year.

Value added in the mining and quarryingsector, which in 1985 declined by 5.5%, roseby 4.2% in 1986. This increase was primarilyattributable to a rise in oil production of 4.9%compared with a decrease of 6.5% in 1985.The increase in oil production was closelyassociated with the temporary relaxation onquotas of OPEC countries as a result of itsmeeting in December 1985. In addition, tinproduction increased by 10.1% comparedwith a decrease of 6.0% in the preceding year.Also, the trade sector grew by 3.0% comparedwith 1.7% in 1985, mainly stemming from theincrease in the foreign trade sector.

The growth rate of the agricultural sector in1986 declined, namely from 4.2% in 1985 to2.5%. This decrease reflected lower growthin rice production (0.9% versus 2.4%) mainlybrought about by brown locust plague. It isworth noting that growth in all agriculturalsub-sectors declined, except forestry whichimproved from - 4.9% to - 1.1%. Thisimprovement was mainly accounted for by anincrease in plywood production.

As in the agricultural sector, the growthrate in the manufacturing sector alsodeclined in 1986, to 5.5% from 8.3% theyear before. This lower growth was primarilyattributable to a lower value added by oilrefineries and LNG, from 70.7% and 4.6%,to 36.1% and 0.2%, respectively. Inaddition, the growth in non-oil/gasmanufacturing declined from 6.2% to 4.9%.Nevertheless, production in severalmanufacturing industries, such as cement,fertilizer, and basic metals increasedsignificantly.

Furthermore, the growth rate of thebanking and other financial intermediariessector increased from 0.3% to 5.3%,transportation and communication from0.9% to 1.3%, and services from 2.0% to2.8%. Sectors which experienced lowergrowth rates were electricity, gas, and watersupply which in 1986 grew only by 6.5%,ownership of dwelling by 3.5%, and publicadministration and defence by 2.5%. Outputin the construction sector, which increasedby 2.6% in 1985, recorded a decline of0.2% in 1986 (Table 8.2).

Viewed on the basis of a broadclassification, the oil/gas sector performed

Vlll. PRODUCTION, PRICES, AND INFRASTRUCTUREVlll. PRODUCTION, PRICES, AND INFRASTRUCTUREVlll. PRODUCTION, PRICES, AND INFRASTRUCTUREVlll. PRODUCTION, PRICES, AND INFRASTRUCTUREVlll. PRODUCTION, PRICES, AND INFRASTRUCTURE

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well, recording growth of 4.8% in 1986compared with a decline of 2.5% in 1985;non-oil/gas sector rose by 2.8% versus 3.6%in the preceding year. Higher growth in theoil/gas sector was due to a rise in the valueadded of oil and natural gas, i.e., 4.3%compared with a drop of 5.9% in 1985.

Based on current prices, in 1986 theshare of the agricultural sector in total GDPincreased from 23.7% to 25.8%,manufacturing sector from 13.5% to 14.4%,while that of mining sector decreased from16.3% to 11.1%. It is worth noting that theshare of most other sectors in GDP increaseda little (Table 8.3).

From the expenditure approach, thehigher economic growth in 1986 was mainlyattributed to an increase in export volumeof goods and services by 13.7% comparedwith a negative growth of 8.0% in thepreceding year. This increase occurred inthe most important export commodity,namely oil, which rose by 17.2% in 1986(Table 8.5).

The growth rate of private consumptionexpenditures in 1986 increased from 2.4%to 3.3% and that of governmentconsumption expenditures dropped from7.5% to 0.1%. The increase in privateconsumption was closely associated with theincrease in real income while the decreasein government consumption reflectedadjustment efforts in response to a fall ingovernment revenues. Gross domesticcapital formation in the reporting year fellsharply, from 11.1% to -7.7%, reflectinglower development expenditures.

As a consequence of these developments,in 1986 the share of private consumptionin GDP stood at 63.9%, governmentconsumption 11.7%, exports 20.8%, imports

22.6% and gross domestic capital formation26.2% (Table 8.6) .

In 1986, the terms of trade index declinedby 26.2% compared with a decline of 0.6%in the preceding year. This was due to adecrease in the export price index of 18.7%and a rise in the import price index by10.1% (Table 8.7). The deterioration interms of trade brought about a shift in thegrowth of gross domestic income (GDY) froma rise of 2.2% to a decline of 3.8%.

The GDP at current prices in 1986reached Rp 96,489 billion. With a mid-yearpopulation of 166.9 million, GDP per capitain 1986 stood at Rp 578,124.63, roughlyunchanged from the preceding year.

B. Price DevelopmentsB. Price DevelopmentsB. Price DevelopmentsB. Price DevelopmentsB. Price Developments

In the reporting year, prices remainedrelatively stable despite the Government’sdecision to devalue the rupiah and to raisethe floor price of paddy and transportationfares. The rate of inflation as measured byconsumer price index (CPI) picked up in1986/87 to 8.83% compared with 5.66%in the preceding year (Table 8.8). Thistolerable rate was attributable to the pursuitof tight fiscal and cautious monetary policiesthat were supported by adequate supplies ,of consumption goods.

In 1986/87, prices of the clothing grouprecorded the highest increase, of 11.43%compared with 3.38% in the preceding year.Meanwhile, prices of the miscellaneous andfoodstuff groups increased by 10.59% and9.61% compared with 4.95% and 6.12%,respectively. On the other hand, prices of thehousing group showed a lower increase, i.e.,5.72% compared with 6.36% in 1985/86. Ofthe 8.83% price increase, 3.82% originatedfrom the foodstuff, 2.27% from the

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DEVELOPMENT OF GROSS DOMESTIC PRODUCTDEVELOPMENT OF GROSS DOMESTIC PRODUCTDEVELOPMENT OF GROSS DOMESTIC PRODUCTDEVELOPMENT OF GROSS DOMESTIC PRODUCTDEVELOPMENT OF GROSS DOMESTIC PRODUCTAAAAAT CURRENT AND 1983 CONSTT CURRENT AND 1983 CONSTT CURRENT AND 1983 CONSTT CURRENT AND 1983 CONSTT CURRENT AND 1983 CONSTANT PRICES,ANT PRICES,ANT PRICES,ANT PRICES,ANT PRICES,

EXCEPT FOR 1982EXCEPT FOR 1982EXCEPT FOR 1982EXCEPT FOR 1982EXCEPT FOR 1982

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GROWTH OF SEVERAL IMPORGROWTH OF SEVERAL IMPORGROWTH OF SEVERAL IMPORGROWTH OF SEVERAL IMPORGROWTH OF SEVERAL IMPORTTTTTANT SECTORSANT SECTORSANT SECTORSANT SECTORSANT SECTORSIN GROSS DOMESTIC PRODUCTIN GROSS DOMESTIC PRODUCTIN GROSS DOMESTIC PRODUCTIN GROSS DOMESTIC PRODUCTIN GROSS DOMESTIC PRODUCT

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PERSENTPERSENTPERSENTPERSENTPERSENTAGE DISTRIBUTOR OF GROSS DOMESTIC PRODUCTAGE DISTRIBUTOR OF GROSS DOMESTIC PRODUCTAGE DISTRIBUTOR OF GROSS DOMESTIC PRODUCTAGE DISTRIBUTOR OF GROSS DOMESTIC PRODUCTAGE DISTRIBUTOR OF GROSS DOMESTIC PRODUCTBY SECTOR ABY SECTOR ABY SECTOR ABY SECTOR ABY SECTOR AT CURRENT PRICEST CURRENT PRICEST CURRENT PRICEST CURRENT PRICEST CURRENT PRICES

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miscellaneous, 1.71% from the housing, and1.03% from the clothing groups.

With respect to the foodstuff group,significant price increases were recorded inthe subgroups of eggs, milk and dairyproducts (16.14%), spices (15.35%), andfresh fish (14.62%). In addition, thesubgroup of grain, which has the biggestshare in the foodstuff group, in the reportingyear rose only by 2.85% . The low priceincrease in this subgroup was attributed todeclines in the price of rice for severalmonths, particularly in April 1986 (4.95%)and March 1987 (6.36%).

Furthermore, in the miscellaneous group,significant price increases were recorded in

the subgroups of transportation (13.02%)and recreation (11.65%). In the housinggroup, significant price increases wereregistered in the subgroups of householdfurniture (13.89%) and residential housing(7.94%), while in the clothing groupsubstantial rise was recorded in thesubgroups of men’s clothing (12.81%) andchildren’s clothing (11.62%).

During the reporting year, the averagemonthly price increase was 0.74%compared with 0.47% in 1985/86.Significant price increases occurred inSeptember and October 1986, i.e., 2.81%and 2.03%, respectively, primarilyattributed to the rupiah devaluation onSeptember 12, 1986 and an increase in the

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price of rice in October 1986. A significantincrease also occurred in February 1987(1.46%), mainly attributed to the increasein transportation fares.

Wholesale price increased by 3.98% in1986/87 compared with 4.30% in thepreceding year. This low rate of priceincrease was attributable to a decline in theprice of export commodities of 18.7%. Inthe meantime, prices of other commoditiessuch as imports as well as agricultural,manufactured, and mining productsincreased by 14.06%, 9.64%, 9.22%, and6.15%, respectively.

In the reporting year, the price of severalnon-oil export commodities increased markedly.The average prices of plywood, RSS I rubber,and Robusta coffee in Jakarta rose by 27.96%,46.76%, and 21.21% to Rp 3,649.00 per piece,Rp 1,119.53 per kg, and Rp 2,618.75 perkg, respectively (Table 8.9).

C. PopulationC. PopulationC. PopulationC. PopulationC. Population

As in the previous years, the governmentpolicy on population continued to addressthe main problems, namely its high growthrate, imbalances in its distribution and agestructure, and the limited employment

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INDONESIAINDONESIAINDONESIAINDONESIAINDONESIA’S CONSUMER PRICE INDEX’S CONSUMER PRICE INDEX’S CONSUMER PRICE INDEX’S CONSUMER PRICE INDEX’S CONSUMER PRICE INDEXBY GROUPBY GROUPBY GROUPBY GROUPBY GROUP

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opportunities and skill that neededimprovement. Based on a population growthrate of 2.13%,1) total population at the endof 1986 was projected to reach 167.4million.

This relatively high growth rate of thepopulation has generated a large numberof new entrants into the labor force. At thesame time, the growth of employmentopportunities was less than that of the laborforce, leading to a rise in unemployment.

In addition, these problems wereaggravated by the fact that the labor forcewas generally inexperienced and unskilled.

To solve these problems, the Governmentcontinued to expand employmentopportunities, to improve the skills of laborforce, and to encourage transmigration aswell as the family planning program.

1. Labor force1. Labor force1. Labor force1. Labor force1. Labor force

The main problem facing the labor forcein 1986/87 was employment opportunitiesbeing inadequate to absorb the increasingnumber of entrants into the labor market.With a growth rate of 4.0%, labor force in1986 was projected to increase by 2.3million to 66.4 million.

To overcome these problems, theGovernment continued to implement laborintensive programs and to improve thequality of labor force. Labor intensiveprograms were implemented, among otherways, by fostering the informal sector andpromoting its existence in the Indonesianeconomic system by strengthening thelinkage, between the informal and formalsectors. Meanwhile, to improve the qualityof the labor force, the Governmentcontinued to carry out professional trainingthrough the vocational training program(Balai Latihan Kerja or BLK). Furthermore,in an effort to allocate the labor forceefficiently, the Government maintainedimplementation of the interlocal workprogram (Antar Kerja Lokal or AKL), the

1) The outcome of the intercensal population survey (SurveiPenduduk Antar Sensus or Supas), October 1985.

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interregional work program (Antar KerjaAntar Daerah or AKAD), the internationalwork program (Antar Kerja Antar Negara orAKAN) and the transmigration program.

Job seekers registered at the manpowerbourse in 1986 amounted to 888.6thousand persons, of which 6.4% weregraduates from universities, 64.1% fromhigh schools, 12.2% from secondaryschools, and 17.3% from primary schoolsand primary school drop-outs. On the otherhand, the vacancies were available for only

151.8 thousand people. Of this number,only 120.9 thousand people (79.6%) wereeligible for working, while the remainderwere not, partly because their skills werenot appropriate to the needs (Tables 8.10and 8.11).

As regards minimum wages, which wasdesigned to meet subsistent needs, theaverage of the highest and lowest wagesrecorded increases in 1986, of 27.6% and21.4%, respectively (Table 8.12). Takinginto account the inflation rate in 1986, the

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average of both the lowest and highest wagesincreased in real terms by 11.6% and17.2%, respectively.

2 . T2 . T2 . T2 . T2 . Transmigra t ionransmigra t ionransmigra t ionransmigra t ionransmigra t ion

The government policy on transmigrationin the reporting year continued to be directedtoward achieving a better distribution ofpopulation, increasing the income of thetransmigrants, and utilizing national resources.

In the meantime, due to the limited fundsavailable in 1986/87, the Governmentplaced priority on the implementation of thespontaneous transmigration program(transmigrasi swakarsa) by emphasizingimprovement of the quality of settlementareas, by providing more information andguidance to transmigrants as well as bystrengthening the coordination amongproject officers.

As a result of the aforementioned efforts,in the reporting year the number oftransmigrants settled increased by 3.9%reaching 172.9 thousand families or15.2% over the target. Of this number,126.5 thousand families were spontane-ous transmigrants which implied an in-crease of 46.0% over the preceding year(Table 8.13).

As in the previous year, in an effort todevelop plantation crops integrated in thesmallholder’s nucleus estate of thespontaneous transmigration program (PIR-Khusus), the Government altered theprogram into an improved scheme knownas transmigration smallholder’s nucleusestate scheme (Perkebunan Inti RakyatTransmigrasi or PIR Trans). This schemeprovided facilities for free housing, 0.5hectar of land, and credits at a low interestrate.

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3. Family planning3. Family planning3. Family planning3. Family planning3. Family planning

The government policy on family planning(Keluarga Berencana or KB) constituted acontinuation and improvement of the policiesimplemented in the preceding years. Thepolicy was carried out by providing familyplanning information services to the younger

generation and by encouraging the privatesector and the public to participate in thenational family planning program. In addition,services were improved and the supply ofvarious types of contraceptives was supportedby a regular pattern of supply and distribution.

To expand family planning services, the

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Government had built 8,464 family planningclinics as of the end of the reporting year. Withregard to KB participants, the number ofactive KB members rose by 8.9% reaching16.7 million, while that of new membersdecreased by 2.7% to 4.9 million comparedwith 5.1 million in the preceding year (Table8.14).

D. InvestmentsD. InvestmentsD. InvestmentsD. InvestmentsD. Investments

In the repoting year, the Government wasconfronted with a difficult situation asregards stimulating economic activity owingto the drop in the world oil prices.

To sustain economic activity in the reportingyear, the Government undertook a series offundamental measures (the May 6, 1986 andOctober 25, 1986 packages noted earlier) tocreate a business climate more conducive toinvestment activity. In addition, theGovernment revised the investment prioritylist (Daftar Skala Prioritas or DSP) andconducted promotion activities abroad toattract foreign investments.

The May 6, 1986 package provided,among other things, for tax and import dutyincentives to PMA and PMDN companies.In addition, this policy also carried thestipulation to extend business license andthe provision of PMDN facilities to certainPMA companies. The October 25, 1986package was designed to encourage theexports of PMA and PMDN companies.

The DSP, which contains investmentguidelines, was improved to provide broaderopportunities for investors, either under PMA,PMDN or non-PMA/PMDN scheme, to investin various fields of business activities. ThisDSP covered 1,429 business fields consistingof 1,354 open fields and 75 closed fields fornew investments. Of these 1,354 open fields,

1,117 fields were only open for investmentsunder PMDN and the remainder (237 fields)for the investments apart from the PMA/PMDN. Of the 1,117 open fields under PMDN,926 fields were also eligible for PMA.

1. Foreign direct investment (PMA)1. Foreign direct investment (PMA)1. Foreign direct investment (PMA)1. Foreign direct investment (PMA)1. Foreign direct investment (PMA)

To create a more attractive business climatefor foreign investors, in 1986/87 theGovernment suspended the collection of valueadded tax (VAT) on imported capital goods,2)

as well as granted drawback of import dutiesfor certain imported inputs used in productionby PMA companies.3) Furthermore, theGovernment also established a number of newregulations, namely the extension of PMAoperations for 30 years following the approvalof its expansion,4) and equal treatmentafforded to certain PMA companies as thatgiven to PMDN companies.5) In addition, theGovernment encouraged PMA companies toreinvest their profits or invest their funds inother established companies, and allowforeign partners to hold a greater share inestablishing certain PMA companies.6) TheGovernment also provided opportunities forforeign investors to invest in PMDNcompanies that required additional capital,either for export purposes or for improvingthe financial conditions of the concernedPMDN companies.7) It may be added that toattract foreign capital inflows, the Governmentrevoked the ceiling and adjusted the premiumon swap facility to Bank Indonesia.8)

2) Minister of Finance Decree No 325/KMK.01/1986, May6, 1986.

3) — Government Regulation No.21/1986, May 6, 1986.— Minister of Finance, Minister of Trade, and Gover-nor of Bank Indonesia Joint Decrees Nos.318/KMK.01/1986; 137/Kpb/V/86; and19/6/Kep/GBI, May 6,1986.

4) See footnote 31) in Chapter VII.5) See footnote 32) and 37) in Chapter VII.6) See footnote 34) in Chapter VII.7) See footnote 35) in Chapter VII.8) See footnote 36) in Chapter VII.

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In 1986, the Government approved 50new projects with intended investmentsunder PMA of $ 826.2 million comparedwith 49 projects at a value of $ 859.0 millionin the preceding year. The lower value ofintended investments mainly occurred inthe metal and construction industries,reaching only $ 81.7 million and $ 64.7million compared with $ 244.2 million and$ 122.3 million in 1985. On the other hand,increases in investments were recorded inseveral fields, especially agricultural andtimber industries, reaching $ 125.9 millionand $ 31.9 million, respectively.

Since the enactment of the PMA Law in1967 up to the end of 1986, approvedinvestment reached $ 15,808.8 millioncovering 805 projects. Of these, 75.7% wasinvested in manufacturing, 10.0% in mining,4.9% in agricultural, and 9.4% in othersectors (Table 8.15). By regional distribution,most of the intended projects were located inJakarta, West Jawa, and East Jawa. Accordingto the value of intended investment, the largestvalue was invested in West Jawa followed byJakarta and North Sumatra (Table 8.16). Bycountry of origin, the largest amount ofintended investments originated from Japanwith a value of $ 5,251.4 million, Hong Kong$ 1,880.6 million, and the USA $ 1,215.8million (Table 8.17).

From June 1967 to the end of 1986, theamount of PMA realized reached $ 6,871.7million or 43.5% of the total intendedinvestments. Of the realized amount, 65.2%was invested in manufacturing, 15.0% ingeneral mining, and 6.2% in forestry sectors(Table 8.18).

2. Domestic investments (PMDN)2. Domestic investments (PMDN)2. Domestic investments (PMDN)2. Domestic investments (PMDN)2. Domestic investments (PMDN)

As was the case for PMA companies, in1986/87 the Government also provided tax

incentives to PMDN in the forms of taxexemptions from VAT on imported capitalgoods9) and drawback on import duties oncertain imported inputs.10)

In 1986, approved intended investmentstotaled 316 projects at a value of Rp 4,416.7billion, or an increase of 17.8% over thepreceding year. Increases in intendedinvestment were recorded in several fieldsof activities, mainly in general mining andagricultural sectors, by 137.0% and109.0%, respectively. On the other hand,decreases in intended investments weremainly occurred in hotel and constructionsectors, of 94.5% and 72.4%, respectively.

Since the enactment of PMDN Law in July1968 until the end of 1986, intendedinvestment under PMDN amounted toRp 32 ,242 .4 b i l l i on covering 4,057projects. By field of activities, most of theintended investments were in manufacturing,agricultural, and mining sectors. By numberof projects, the largest portion was inmanufacturing, forestry, and agriculturalsectors (Table 8.19).

By regional distribution, both in numberand value of the approved projects, thelargest portion was planned in West Jawa,Jakarta, and East Jawa. With respect toprojects intended to be implemented outsideJawa, the largest portion was in EastKalimantan and North Sumatra (Table 8.20).

E. AgricultureE. AgricultureE. AgricultureE. AgricultureE. Agriculture

Agricultural policy in the reporting yearcontinued to be aimed at reaching self-sufficiency in food, increasing foreignexchange earnings, and creating employment

9) See footnote 2) in this chapter.10) See footnote 3) in this chapter.

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opportunities. Those efforts were carried outthrough intensification, extensification,diversification, and rehabilitation programswhile taking into account the conservation ofnatural resources and preservation of theenvironment. In addition, the Governmentalso raised the floor price of dry paddy11), andprovided wider opportunities to investors inplantation estates and fisheries, especially oilpalm plantation and shrimp cultivation.12)

In 1986, agricultural production stillrecorded a favorable performance though notas good as that in the preceding year. Foodcrop production in general increased, exceptcassava and sweet potatoes. Plantation crops,except pepper, recorded increases. Favorabledevelopment was also registered in livestocks

and fishery. Furthermore, forestry production,which in the preceding year declined, in1986 increased significantly.

1. Food crops1. Food crops1. Food crops1. Food crops1. Food crops

In 1986, efforts to increase major food cropproduction, namely rice and secondary crops,continued to be carried out throughintensification, extensification, anddiversification. The intensification wasimplemented through the mass intensificationprogram (Intensifikasi Massal or Inmas),which was subsequently augmented by thespecial intensification program (IntensifikasiKhusus or Insus), and the special operationprogram (Operasi Khusus or Opsus). Inaddition, to promote the quality of theintensification program in the irrigated areasof Jatiluhur and North Coast of West Jawa(Jalur Pantura), in the planting year of 1987

11) Presidential Instruction No.4, December 1, 1986.12) The May 6, 1986 package.

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the super insus program (Supra Insus) was tobe implemented. As a result of theintensification efforts, average production perhectare of these crops showed increases.Meanwhile, the application of growthhormones was enhanced, particularly topaddy, corn, and soybeans.

The extensification program was carriedout through the opening of new rice fieldswhich in the reporting year reached 51.8thousand ha. With respect to cropdiversification, the Government continuedto increase the production of secondary andhorticultural crops.

1.1 Rice1.1 Rice1.1 Rice1.1 Rice1.1 Rice

In 1986, the production of rice increasedby 0.9% to 26.8 million tons, although theharvested areas decreased by 0.1%, mainlydue to the brown locust plague on 59.0thousand ha. The increase in rice productionin 1986 was attributable to theenhancement of intensification efforts asreflected in the increase of averageproduction per ha, by 1.1% (Table 8.22).As a result of those efforts, domestic rice

consumption, estimated at 26.6 million tons,was achieved in the reporting year.

To reduce the rate of rice loss, estimatedbetween 12.0% and 21.0%, treatmentduring the post-harvest period was improvedthrough supervision activities and provisionof facilities. These efforts, among others,were carried out by adding new supervisors,huskers, and rice hullers. It may be notedthat 300 units of rice mills with a capacityof 1.5 million tons were built in 1986, sothat the number and total capacity of ricemills increased to 60.3 thousand units and24.5 million tons, respectively (Table 8.23).To increase rice production and farmer’sincome, in the reporting year theGovernment raised the floor price of drypaddy from Rp 175.00 per kg to Rp 190.00per kg.13)

1.2. Secondary crops1.2. Secondary crops1.2. Secondary crops1.2. Secondary crops1.2. Secondary crops

In 1986, the production of secondarycrops, such as soybeans, corn, peanuts, andmung beans, increased by 37.5%, 37.0%,16.3%, and 8.0%, respectively. Thefavorable increase in soybeans and corn was

13) Presidential Instruction No. 4, December 1. 1986.

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attributable to government policy andfarmer’s participation in promoting soybeanand corn cultivation as well as in increasingthe application of growth hormones. Theseefforts were implemented to meet theincreasing domestic needs of soybeans andcorn, part of which had always beenimported. Consequently, in the reportingyear, the imports of soybeans and corndecreased by 49.3% and 30.8% to 153.5thousand tons and 30.8 thousand tons,respectively. With respect to peanuts andmung beans, the increase in production wasdue mainly to the expansion of harvestedareas and a rise in average production perhectare. Meanwhile, the production ofcassava and sweet potatoes decreased by8.4% and 9.0%, respectively, due toreduced harvested areas (Table 8.24).

2. Plantation crops2. Plantation crops2. Plantation crops2. Plantation crops2. Plantation crops

In the reporting year, governmentpolicy in promoting the development ofplantation crops continued to emphasizesmallholder’s estates. These efforts wereconsistently carried out throughintensification, extensification,diversification, and rehabilitation, inaddition to the implementation ofsmallholder’s plantation nucleus estates(Perusahaan Inti Rakyat or PIP-BUN) andproject management unit (Unit PelaksanaProyek or UPP).

In 1986, the production of plantationcrops, except pepper, recorded increases.Meanwhile, the plantation areas reached9,639 thousand ha, consisting of 8,362

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thousand ha of smallholder’s estates, 790thousand ha of state estates, and 487thousand ha of private estates.

2.1. Rubber2.1. Rubber2.1. Rubber2.1. Rubber2.1. Rubber

In 1986, rubber plantation areas covered2.8 million ha, of which 82.6% wassmallholder’s estates and the remainder wasstate and private estates. Of the 2.8 millionha, 23.0% was not yet in production and15.0% was no longer in production.

Rubber production in 1986 increased by0.5% reaching 1,060 thousand tons, of which729 thousand tons were produced bysmallholder’s estates, 216 thousand tons bystate estates, and 115 thousand tons byprivate estates. The increased production wasprimarily brought about by increased domesticconsumption. Furthermore, rubber exportsdeclined by 5.0% to 1,027 thousand tons.

In 1986, the output of crumb rubberrecorded an increase of 7.2% reaching 884thousand tons and its share increased to83.4% of the total rubber output (Table8.25).

2.2. Coconut2.2. Coconut2.2. Coconut2.2. Coconut2.2. Coconut

Coconut plantation areas in 1986 covered3,182 thousand ha, most of which (98%)were smallholder’s estates. Of those areas,around 20.0% was not yet in production and6.0% was no longer in production.

In 1986 copra production rose by 8.9%reaching 2,091 thousand tons. The rise wasmainly attributable to crop rejuvenationprogram using hybrid coconuts.

2.3. Oil palm2.3. Oil palm2.3. Oil palm2.3. Oil palm2.3. Oil palm

In promoting business opportunities forinvestors in oil palm plantation, theGovernment improved the PIR scheme bychanging the ratio between nucleus andplasma areas at the first production stage,namely from 20:80 to 40:60.14) In theprevious ratio, a company opening a unit ofnucleus area was required to create 4 unitsof plasma area for the community aroundthe nucleus area. In the new ratio, acompany opening 1 unit of nucleus area isonly required to create 1.5 units of plasmaarea. However, after 10 years of operation,the plasma areas created have to reach 4units.

Most oil palm plantations (91.0%) werecultivated by state and private estates. In1986, the plantation areas increased by2.8% to 578.6 thousand ha, of which 66.6%was state estates and 24.5% was privateestates.

Palm oil output in 1986 rose by 2.1%reaching 1,269 thousand tons which wasclosely related to the intensification andextensification efforts. Of that amount, 923

14) The May 6, 1986 package.

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thousand tons were produced by stateestates and the remainder by private estates.Along with the increased production, palmoil exports rose by 25.9% reaching 590.0thousand tons.

2.4. Sugarcane2.4. Sugarcane2.4. Sugarcane2.4. Sugarcane2.4. Sugarcane

In encouraging sugar production andraising farmer’s incomes, in the reportingyear the Government continued to improvethe smallholder’s sugarcane intensificationprogram (Tebu Rakyat Intensifikasi or TRI),to increase production capacity of sugarmills, and to expand planting areas outsideJawa. In 1986, the acreage of sugarcaneplanting areas increased by 1.0% to 358thousand ha, of which 215 thousand hawere under the TRI program.

Sugar production in 1986 went up by6.2% reaching 2,016 thousand tons. It canbe added, to meet the needs for the nationalstocks, in the reporting year the Governmentimported 162.5 thousand tons of sugar.

2.5. T2.5. T2.5. T2.5. T2.5. Teaeaeaeaea

In the reporting year, efforts to promotetea production continued to be implementedthrough extensification, rejuvenation, andenhancement of guidance. In line withthose efforts, tea production in 1986reached 136 thousand tons or 7.1% higherthan that in the preceding year. Of theoutput, 77.0% was produced by largeestates all of which comprised black tea.

In 1986, tea plantation areas covered134.4 thousand ha, of which 60.0% wascultivated by large estates and theremainder by smallholder’s estates. In thereporting year, exports of black tea declinedby 13.8% to 89.0 thousand tons.

2.6. Coffee2.6. Coffee2.6. Coffee2.6. Coffee2.6. Coffee

In the reporting year, efforts to promotecoffee production continued to be carried outthrough rejuvenation and guidance. Throughthose efforts, coffee production in 1986 wentup by 27.3% reaching 396 thousand tons.

Most coffee output was exported; in 1986those exports reached 305.8 thousand tonsor 1.9% above that in the preceding year. Theincrease in exports was closely related to theInternational Coffee Organization (ICO)stipulation providing a temporary easing ofthe quota system to its members.

In 1986, coffee plantation areas covered928 thousand ha, almost all of which (94.0%)comprised smallholder’s estates. Of the totalareas, 25.0% had not yet produced and 9.0%was a longer in production.

2.7. T2.7. T2.7. T2.7. T2.7. Tobaccoobaccoobaccoobaccoobacco

Most of tobacco production (97.0%) wasproduced by smallholder’s estates and theremainder by state and private estates. In1986, tobacco production increased by 1.9%to 163.6 thousand tons. This increase wasclosely associated with the expanded areasof 1.0% to 297 thousand ha.

Exports of tobacco, consisting of thevarieties of Deli, Vorstenlanden, and Besuki,went up by 15.6% reaching 24.4 thousandtons. To meet the needs of domestic cigaretteindustry, especially for Virginia variety,approximately 11.2 thousand tons of tobaccowere imported in 1986.

2.8. Spices2.8. Spices2.8. Spices2.8. Spices2.8. Spices

Major spice plantations, includingpepper, nutmeg, and clove, were mostly

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(98.0%) cultivated by smallholder’s estates.In 1986, the plantation areas of pepper,nutmeg, and clove increased by 3.4%,11.8%, and 4.3% to 82.7 thousand ha, 66.5thousand ha, and 685.6 thousand ha,respectively.

In 1986, pepper output decreased by2.4% to 40.0 thousand tons. On the otherhand, production of nutmeg and cloveincreased by 6.7% and 26.2% reaching16.0 thousand tons and 53.0 thousand tons,respectively.

Exports of pepper went up by 14.2% to30.6 thousand tons, whereas that ofnutmeg declined by 22.7% to 6.1 thousandtons. Meanwhile, to meet domesticconsumption, cloves of Zanzibar varietywas still imported at the quantity of 3.5thousand tons.

3. Livestock3. Livestock3. Livestock3. Livestock3. Livestock

To increase production as well as qualityof livestock and its products, in 1986 theGovernment continued to implement variousintensification and extensification programs.The intensification program was conductedthrough diversification of livestock (PancaUsaha Ternak), mass supervision to poultrybusiness (Penyuluhan Massal PeternakanAyam), development of smallholder’s dairyfarms, and improvement of poultryhusbandry under PlR-Unggas scheme; theextensification program was conductedthrough the expansion of ranches outsideJawa.

Through those efforts, meat, egg, and milkproduction registered significant increases,by 6.6%, 16.8%, and 14.6% reaching 861thousand tons, 432 thousand tons, and 220

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million liters, respectively. Furthermore,livestock population in 1986 also showeda significant increase (Table 8.26).

4. Forestry4. Forestry4. Forestry4. Forestry4. Forestry

To promote the utilization of forestproducts, while at the same time conservingforest resources, the Government continuedto exert efforts toward reforestation,afforestation, and supervision on forestexploitations.

In the reporting year, the acreage ofreforestation increased by 51.6% reaching60.8 thousand ha, whereas that of afforestationdeclined by 41.8% to 177.8 thousand ha(Table 8.27). The supervision on forestexploitation was carried out to ensure thatcompanies holding forest exploitation rights(Hak Pengusahaan Hutan or MPH), wouldcomply with their obligations as stipulated inthe agreement. The number of HPH holdersincreased by 2 to 533, while theexploitation area increased by 0.1 millionha to 54.6 million ha.

In 1986, the output of timber, the mostimportant forest product, rose by 12.9%reaching 27.4 million m3, a rise which wasclosely related to increasing domestic needs.

Meanwhile, exports of processed timber,consisting of plywood and sawn timber,increase by 6.1% to 4.9 million tons. Exportof other important forest products, such as,rattan and resin, rose by 7.3% and 25.0%,respectively, whereas those of copaldecreased by 45.0% (Table 8.28).

5. Fishery 5. Fishery 5. Fishery 5. Fishery 5. Fishery

Efforts to increase fishery production in1986 continued to be directed to raising theincome of fishermen as well as increasingforeign exchange earnings. These effortswere conducted through motorizingtraditional fishing boats and improving theproductivity of fishery resources. Inaddition, to further promote the cultivationof shrimps through the smallholder’snucleus shrimppond cultivation scheme(Tambak Inti Rakyat or TIR), theGovernment stipulated the ratio betweennucleus and plasma area at 40 : 60.15)

Fishery output in 1986 rose by 5.0% to2,530 thousand tons, most of which (76.0%)were produced by sea fishery. The productionof sea fishery increased by 5.5% to 1,923

15) The May 6, 1986 package.

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thousand tons and that of inland fishery wentup by 5.9% to 607 thousand tons.

In 1986, exports of shrimps, the mostimportant commodity of the fishery industry,recorded an increase of 9.7% to 54.2thousand tons.

FFFFF. Mining. Mining. Mining. Mining. Mining

In the reporting year, government policieson mining constituted a continuation of thepolicies taken in the previous years, namelyto increase mining output and to diversifynon-oil energy resources. Therefore,exploration and exploitation activities aswell as development of mining technologycontinued to be pursued.

In the reporting year, production ofseveral important mining products, such as,oil, natural gas, tin, and coal, showedincreases. The increase in oil productionwas closely related to the result of the OPECmeeting in December 1985, which provideda temporary easing of production quotacontrol to its members. Meanwhile, theincrease in natural gas production, wasmainly occasioned by an increase indomestic consumption. The rise in tinproduction was closely related to theabolition of export quotas for ITC membersin April 1986, while the increase in coalproduction was due mainly to a rise indomestic demand. It may be added that theproduction of other mining products, suchas, copper, nickel-ore, gold, and silver,registered increases, however, ferro-nickeland bauxite experienced decreases (Table8.29).

1. Oil and natural gas1. Oil and natural gas1. Oil and natural gas1. Oil and natural gas1. Oil and natural gas

In the reporting year, policies taken inthe field of oil and natural gas were still

aimed at finding new deposits despite asharp decrease in world oil prices. Thosepolicies were aimed at sustaining andincreasing the production of oil and gaswhich so far have held an important role inthe Indonesian economy. In line with theeffort to find new deposits; exploration andexploitation of new wells were conductedin cooperation with foreign contractorsunder Production Sharing Agreements,Contract of Work Agreements, andJoint-venture Agreements.

In 1986, 4 new agreements were signed,consisting of 3 Production SharingAgreements and 1 Joint-venture Agreement,bringing the total to 76 and 12 agreements,respectively. Of these agreements, 24 arein production. Meanwhile, the number ofwells drilled was 157, of which 12 weredrilled by Pertamina, 15 by contractorsunder Contract of Work Agreements, and130 by contractors under ProductionSharing Agreements.

In 1986/87, oil production increased by2.3% to 499.0 million barrels or 1.367million barrels per day, comprising 447.8million barrels of crude oil and 51.2 millionbarrels of condensate. Of the 499.0 millionbarrels, 456.1 million barrels (91.4%) wereproduced by contractors under ProductionSharing Agreements, whereas theremainder (8.6%) was produced byPertamina and contractors under Contractof Work Agreements. Natural gasproduction in 1986/87 increased by 5.1%to 1,666.7 million MSCF. This was attributedto increased output of contractors underProduction

Sharing Agreements by 5.6% to 1,411.7million MSCF, Pertamina by 2.1% to 232.9million MSCF, and contractors underContract of Work Agreements by 4.7% to

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22.1 million MSCF. It is worth noting thatthe higher output was mainly associated withan increase in demand for natural gas asinput in the production of LNG, LPG, andurea fertilizer, and also as fuel in cementand steel industries.

2. T2. T2. T2. T2. Tininininin

In order to promote exports of non-oil andgas, the Government continued to increasetin production. As a result, in 1986/87 tinproduction rose by 19.1% to 24.9 thousandtons, while exports increased by 3.0% to 24.0thousand tons. In addition, domestic tinconsumption increased by 39.3% to 1.2thousand tons due to higher utilization of tinas input in domestic production.

It is worth noting that in efforts to stabilizeand raise the price of tin in the internationalmarket, ATPC has imposed a one-yearexport quota to its members effective asfrom March 1, 1987. This effort was taken

to overcome falling tin prices due to thecessation of the ITC activities in managingtin bufferstocks.

3. Coal3. Coal3. Coal3. Coal3. Coal

In line with the policy to promote theutilization of coal as an alternative energyresource, efforts to increase coal productioncontinued to be pursued by such measuresas the expansion of Bukit Asam coal minein South Sumatera and Ombilin coal minein West Sumatera. In the reporting year, coalproduction increased by 16.4% to 1,731.8thousand tons, of which 1,067.6 thousand tonswere produced by Bukit Asam coal mine andthe remainder by Ombilin coal mine.

In the reporting year, domestic demandfor coal increased significantly, by 63.0%to 1,438.4 thousand tons. This was closelyrelated to the higher utilization of coal asalternate source of energy in the cementindustry and the steam power electrical

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center (Pusat Listrik Tenaga Uap or PLTU).It may be added that a number of coalmines managed by foreign contractors inEast and South Kalimantan have not yetreached the stage of commercialproduction.

4 . Other min ing products4 . Other min ing products4 . Other min ing products4 . Other min ing products4 . Other min ing products

Other important mining products werecopper, nickel, bauxite, gold and silver. Inthe reporting year, the production of copperincreased by 6.9% to 249.2 thousand tonsowing mainly to a higher demand fromJapan, of 16.2% to 247.7 thousand tons.

The production of nickel-ore, ferro-nickel,and nickel-matte is entirely intended forexport. In the reporting year, the productionof nickel-ore and nickel-matte in creased by70.3% and 58.2% to 1,680.6 thousand tonsand 31.8 thousand tons, respectively. Thesesignificant increases were mainly caused byhigher demand from Japan. On the other hand,the production of ferro-nickel decreased by8.3% to 4.4 thousand tons which was mainlydue to a decline in ferro-nickel prices in theworld market. The production of bauxite as abasic material for aluminum, which wasentirely exported to Japan, in the reportingyear still experienced a decrease namely10.7% to 636.4 thousand tons compared witha decrease of 29.4% in the preceding year.This lower production was closely related tothe persistently low price of aluminum in theworld market. In the reporting year, theproduction of gold and silver increasedsignificantly, by 101.2% and 165.5% to 619.6kg and 5,786.0 kg, respectively. Theincreases stemmed from higher exploitationactivities carried out by the private sector. Itmay be added that there were 103 contractsin the form of joint-venture agreementsinvolving 75 private national and 38 foreignenterprises.

G. Elec t r ic PowerG. Elec t r ic PowerG. Elec t r ic PowerG. Elec t r ic PowerG. Elec t r ic Power

The government policy on electricity isdesigned to enhance service to thecommunity and to stimulate economicactivity, especially in the manufacturingsector. To achieve those objectives, effortswere made to increase the installed capacityof electricity generating plants and toexpand distribution networks in order toprovide a sufficient amount of electricityand to improve the quality of service to thecommunity.

The installed capacity of electricitygenerating plants of the State ElectricCompany (Perusahaan Umum ListrikNegara or PLN) in the reporting yearincreased by 27.6% to 6,168 MW (Table8.30). This increase was closely associatedwith a higher installed capacity ofsteam-powered electrical centers (PusatListrik Tenaga Uap or PLTU) andgas-powered electrical centers (Pusat ListrikTenaga Gas or PLTG).

In line with efforts to increase theinstalled capacity of electricity generatingplants, PLN production in 1986 increased

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by 16.3%. On the other hand, electricityproduced by non-PLN decreased by 8.1%.In total, the production of electricity in 1986increased by 14.8% (Table 8.31).

It may be noted that in order to enhanceelectricity services to rural communities, theGovernment continued to implement theelectrification of village program (ProgramListrik Masuk Desa). By February 1987, thenumber of villages benefiting from electricityservices was 13,073, or 21.4% of all villagesin Indonesia.

H. ManufacturingH. ManufacturingH. ManufacturingH. ManufacturingH. Manufacturing

To sustain the development of themanufacturing sector, in the reporting yearthe Government introduced severalfundamental measures covering the May 6,1986, October 25, 1986, and January 15,1987 packages. Those policies, amongothers, were directed to enhancing theefficiency and exports of non-oil/gascommodities in manufacturing sectorthrough the simplification of traderegulations on imports, exemption from anddrawback on import duties16), the reductionof import tariffs on certain commodities and

raw materials, as well as the provision of moreefficient protection to domestic industriesthrough the tariff system.17) To encourage theutilization of domestic products and stimulatethe creativity in design, the Governmentrevised the deletion program for motor-vehicleassembling industry.18) and simplified theprocedures to obtain business licenses in themachine and electrical machine industry.19)

To encourage the development of themanufacturing sector, authority regarding thepromotion and supervision of certainindustries in mining and energy, agriculture,and health was transferred from the Ministryof Industry to each related ministry.20)

The production of refinery industries,such as, fuel products and liquefiednatural gas (LNG), continued to increase.The production of manufacturingindustries, such as, plywood, cement,kretek cigarettes, textile, fertilizer, andthose of basic metal industries alsorecorded increases. Output of severalproducts, such as, production offour-wheeled and two-wheeled motorvehicles increased in 1986/87 afterexperiencing a decline in the precedingyear. In addition, the production of TVsets, white cigarettes, and sewingmachines continued to decline (Table8.32).

16) — Minister of Finance, Minister of Trade, and Governor ofBank Indonesia Joint Decrees Nos. 315/Kpb/V/86, 316/KMK.01/1986, and 160/M/SK/5/1986, May 6, 1986 andNos. 315/KMK.01/1986, 134/Kpb/V/86, and 19/4/Kp/GBI,May 6, 1986.— Minister of Trade Decree No. O9/Kp/I/1987, January 15,1987.

17) — Minister of finance Decree No. 915/KMK.05/1986,October 25, 1986.— Minister of Trade Decree No. 307/Kp/X/1986, October25, 1986.

18) Minister of Industry Decree No. 34/M/SK/2/1987, February3, 1987.

19) Minister of Industry Decree No. 36/M/SK/2/1987, February4, 1987.

20) Government Regulation No. 17 of 1986, April 2, 1986.

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1. Fuel products1. Fuel products1. Fuel products1. Fuel products1. Fuel products

In the reporting year, the policy onrefinery industries continued to be aimedat satisfying domestic consumption andreducing imports. The production of fuelreached 146.3 million barrels or an increaseof 8.5% compared with 5.4% in thepreceding year stemming from the optimumutilization of capacity of Cilacap,Balikpapan, and Dumai refineries. It maybe added that the domestic fuelconsumption in 1986 declined by 1.5% to155.6 million barrels, brought about by theincreased consumption in non-fuel energy.

2. Liquefied Natural Gas (LNG)2. Liquefied Natural Gas (LNG)2. Liquefied Natural Gas (LNG)2. Liquefied Natural Gas (LNG)2. Liquefied Natural Gas (LNG)

The government policy on LNG continuedto be aimed at increasing production andexpanding markets. To fulfill the LNGcontract with the Republic of Korea, in thereporting year the Government completedconstruction of the sixth train in Arun witha production capacity of 1.5 million tonsper year. Consequently, the total productioncapacity of LNG plants consisting of 10trains, reached 1.6.2 million tons, of which9.8 million tons was from Arun plant, andthe remainder from Badak plant. In line withthe increase in production capacity, LNGproduction rose by 0.2% to 15.0 million tonsin the reporting year, consisting of 8.0million tons from Arun plant and 7.0 milliontons from Badak plant.

In 1986, LNG export increased by 2.1 to783.3 million MMBTU which were destinedto Japan, Republic of Korea, and the UnitedStates to the amount of 775.1 millionMMBTU, 6.1 million MMBTU, and 2.1million MMBTU, respectively.

To expand LNG market, in the reportingyear the Government signed a sales contract

of 2.0 million tons of LNG per year withTaiwan.

3. Plywood and sawn timber3. Plywood and sawn timber3. Plywood and sawn timber3. Plywood and sawn timber3. Plywood and sawn timber

To maintain prices and to sustain plywoodexports, in the reporting year theGovernment imposed a quota on plywoodexports.2l) To encourage the domesticindustry and exports of household furniture,the Government prohibited exports of sawntimber of ramin, white meranti and agathisin certain sizes.22)

In the reporting year, the production ofplywood and sawn timber increasedsignificantly, by 14.9% and 4.9% to 5,302.0thousand m3 and 9,900.0 thousand m3,respectively. In the meantime, exports ofthose two commodities also increased, by15.4% and 5.8% to 2,857.0 thousand tonsand 2,120.0 thousand tons, respectively.

4. Fertilizer4. Fertilizer4. Fertilizer4. Fertilizer4. Fertilizer

The government policy of developing thefertilizer industry as one of the mainproducts in supporting the agriculturalsector has been directed to satisfyingincreasing domestic demand as well asexports. To this end, in the reporting yearthe Government expanded thepetrochemical plant in Gresik with anadditional production capacity of 200thousand tons p.a., bringing about a totalproduction of 650 thousand tons p.a.

In line with the increased productioncapacity, in the reporting year theproduction of non-urea fertilizer increased

21) Minister of Trade Decree No. 128/Kp/IV/86, April 12,1986.

22) Minister of Trade Decree No. 305/Kp/X/86, October18, 1986.

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by 10.9% to 1,656.2 thousand tons. Theproduction of urea fertilizer also increased,by 11.5% to 3,999.9 thousand tons, whereasits exports rose significantly, by 38.1% to1,446.0 thousand tons.

5. Cement5. Cement5. Cement5. Cement5. Cement

In support of the effort to encourageutilization of domestic cement and toincrease its export, in the reporting year theproduction and exports of cement increasedsignificantly, by 13.7% and 87.2% to11,163.8 thousand tons and 1,788.0thousand tons, respectively.

To meet its needs for certain types ofcement, in 1986 the Government stillimported cement to the amount of 6.3thousand tons. It is noteworthy that up tothe end of the reporting year there were 10cement factories with total productioncapacity of 17.4 million tons p.a.

6. Paper6. Paper6. Paper6. Paper6. Paper

In the reporting year, the production ofpaper increased by 58.6% to 817.2thousand tons, primarily brought about bythe establishment of paper mill in West Jawaand the expansion of Unit IV paper mill ofPT Kertas Leces in East Jawa with aproduction capacity of 70 thousand tonsand 90 thousand tons p.a., respectively.Through these two mills, domestic needs,especially for writing and printing paper,have been fulfilled. Moreover, part of itsproduction (50.0 thousand tons) wasexported in 1986.

To fulfill the needs for certain types ofpaper (such as for money, cigarettes, longfibre pulp paper) in the reporting year 178.2thousand tons of paper were imported. Tomeet the growing demand for kraft paper, a

kraft paper mill with a production capacityof 150 thousand tons p.a. in North Aceh isunder construction.

7. T7. T7. T7. T7. Textilesextilesextilesextilesextiles

In the reporting year, the textile industrystill faced domestic as well as overseas mar-keting problems. In the domestic market,demand for textiles was still weak, whileexports continued to encounter protection-ist measures imposed by importers such asthe USA and West European countries. Toovercome these problems, the Governmentcontinued to encourage modernization ofmachinery and improvement in productdesigns. Furthermore, to enhance the com-petitiveness of textile exports, several newmeasures were taken with the intention,among others, of simplifying export proce-dures 23) as well as import procedures of cer-tain imported inputs.24)

As a result of these policies, in thereporting year textile production rose by10.5% to 2,761.5 million meters, whileexports increased by 25.4% to 139.2million meters, respectively.

It is noteworthy that in the reporting year,the aromatic center in Plaju, SouthSumatera, started the production of purifiedterephtalic acid with a capacity of 150thousand metric tons p.a. It was expectedthat the needs for the raw materials ofpolyester and nylon could be met.

8. Motor-vehicle tires8. Motor-vehicle tires8. Motor-vehicle tires8. Motor-vehicle tires8. Motor-vehicle tires

In an effort to encourage production and

23) Minister of Trade Decree No. 147/Kp/V/86, May 9,1986.

24) Minister of Trade Decree No. 307/Kp/X/86, October25, 1986.

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export of motor vehicle tires, theGovernment reduced import tariffs on tirecord in order to lower production costs.25)

In the reporting year, the production offour-wheeled and two-wheeled motorvehicle tires increased by 35.1% and 21.9%reaching 5,541.1 thousand and 3,048.5thousand, respectively, as a result of theincreased domestic consumption of tires.

Exports of four-wheeled and two-wheeledmotor vehicle tires increased from 279.5thousand and 70.9 thousand to 406.0thousand and 160.6 thousand, respectively.It can be noted that certain types of tires,such as, aircraft and off-road militaryvehicle tires, were still imported.

9. Basic metal9. Basic metal9. Basic metal9. Basic metal9. Basic metal

To lower the production costs of basicmetal industries, the Government exemptedduties on raw materials required for theproduction of steel billet and steel barindustries.26) To enhance competitivenessand to encourage the utilization of domesticsteel products, the Government reducedimport tariffs on inputs of steel products,which were not produced domestically, andstipulated that the importation of certainsteel products were no longer subject toimport restriction.27)

In the reporting year, the production ofseveral basic metal products increasedsignificantly, such as, iron bars (26.8%),sponge iron (18.1%), steel wire (16.1%), steelbillet (11.8%), and steel bars (6.7%), whereas

that of zinc and aluminum plates decreased.Exports of iron bars, sponge iron, and steelbars in 1986 amounted to 75.8 thousand tons,66.3 thousand tons, and 20.0 thousand tons,respectively. In addition, with the completionof the cold rolling mill in Cilegon (West Jawa),the needs for thin steel plates, which wasformerly imported, would be met.

10. T10. T10. T10. T10. Transport vehiclesransport vehiclesransport vehiclesransport vehiclesransport vehicles

In efforts to improve motor-vehicleindustries, the Government continued toimplement its policy of encouraging thedomestic production of commercial vehicleand two-wheeled vehicle components byrevising the deletion program for motorvehicleassembly industry.28) In line with the abovepolicy, the Government exempted from dutyon certain spare-parts and raw materials formotor-vehicle assembly.29) To sustain theabove policy and in an effort to enhance theutilization of installed capacity and developbusiness creativity, the Government simplifiedthe procedures to obtain business licenses formachine and electrical machine industries.30)

The production of four-wheeled andtwo-wheeled motor vehicle industries, whichhad recorded declines in the previous fewyears, increased by 16.2% and 37.1% in thereporting year to 162-5 thousand units and310.9 thousand units, respectively. Theseincreases, among others, were closelyassociated with the government policy ofproviding a facility to civil servants to purchasefour-wheeled and two-wheeled motorvehicles.31)

25) Minister of Finance Decree No.195/KMK.05/1986,October 25, 1986.

26) Minister of Finance Decree No. 273/KMK.05/1986,April 22, 1986.

27) Minister of Trade Decree No. 09/Kp/I/1987, January15, 1987.

28) Minister of Industry Decree No. 34/M/SK/2/1987,February 3, 1987.

29) Minister of Finance Decree No. 71/KMK.05/1987,February 3, 1987.

30) Minister of Industry Decree No. 36/M/SK/2/1987,February 4, 1987.

31) Minister of Finance Decree No. S-1211/MK.0011/1985,November 1, 1985.

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With respect to the aircraft manufacturingindustry, in the reporting year theproduction of aircraft declined from 8 to 5units, while that of helicopters increasedfrom 7 to 12 units. Meanwhile, theproduction of steel ships declined by 57.7%to 7.7 thousand BRT.

11. Salt11. Salt11. Salt11. Salt11. Salt

To expedite the procurement of salt fordomestic needs, the Government simplifiedthe trade procedure to import table salt32)

and exempted the duty on imported iodineand unprocessed salt.33) As a follow-up tothe existing government policy on the iodinesalt program, the Government stipulated aregulation which prohibited the productionof bricked salt.34)

In the reporting year, salt productiondeclined by 58.2% to 318.0 thousand tonsdue to the implementation of iodine saltprogram and the prohibition on theproduction of brick salt. Since domesticneeds for salt were estimated in the amountof 850 thousand tons, the importation of saltwas required.

12. Other manufacturing products12. Other manufacturing products12. Other manufacturing products12. Other manufacturing products12. Other manufacturing products

In accordance with certain governmentpolicies in the manufacturing sector (suchas the deregulation on trade procedures andpromotion in the utilization of domesticproducts) the outputs of other manufacturingindustries mostly increased.

Other manufacturing products which

recorded significant increases were, amongothers, hand tractors, toothpaste,lightbulbs/TL, kretek cigarettes, anddetergents. In addition, several productsincreased in production, among others,diesel engines, sewing machines, car radiocassette recorders, white cigarettes, andcooking oil.

In the reporting year, a significantincrease in exports was recorded in severalother manufacturing products, namely drybatteries of 357.7% to 2,091 tons,lightbulbs/TL of 237.7% to 171.9 tons, radioand radio cassette recorders of 133.8% to18 tons, and kretek cigarettes of 35.9% to354.7 tons.

I. TI. TI. TI. TI. Transportationransportationransportationransportationransportation

The policy on transportation in the reportingyear, which was a continuation of that inpreceding years, was directed to enhancingtransportation services and improving itsquality, especially as regards domestic andforeign trade. Due to the September 1986devaluation, transportation fares wereselectively adjusted.35) Furthermore, efforts toincrease the frequency and expansion ofinternational flight network continued to becarried out in order to encourage the flow offoreign tourists.

In the reporting year, the output of mosttransportation services increased. In thefield of passenger transportation, significantincreases occurred in river, lake, ferry, andrailway services, while in cargotransportation, substantial increases wererecorded in the ocean-going and interislandshipping.

32) Minister of Trade Decree No. 307/KP/X/86, October25, 1986.

33) Minister of Finance Decree No. 915/KMK.05/1986,October 25, 1986.

34) Director General of Multi Various Industries InstructionNo. 1129/DJAI/VII/1986, July 22, 1986.

35) Minister of Communication Decree No. KM 12/Phb301/Phb-87, January 20, 1987.

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1. Land transportation1. Land transportation1. Land transportation1. Land transportation1. Land transportation

To encourage the expedition of cargo andpassenger flows, in the reporting year, theGovernment completed the construction of71 km of road and 182 m of new bridges,and also upgraded 11,150 km of road and9,179 m of bridges. Improvement of theseinfrastructures was intended to keep up withthe increasing number of land transportvehicles. In 1986, the number of buses,trucks, automobiles, and motorcycles roseby 20.0%, 5.2%, 5.4%, and 6.1%,respectively (Table 8.33).

The improvement in railway services wasdirected to meeting the increasing demandfor passenger and cargo services. Toexpedite railway transportation, in thereporting year the Government completedthe rehabilitation of 350 km of railways and300 bridges. Furthermore, 80 passengercars and 1,796 freight cars were added. Inthe reporting year, the passengers and freighttransported increased by 1.9% and 13.6%,respectively (Table 8.34).

Efforts to improve river, lake, and ferry

transportation were primarily carried out byincreasing the facilities of quays andterminals and dredging channels. Theseefforts were aimed at improving shippingservices and expediting passenger andcargo flows. In the reporting year,passengers and cargoes transportedincreased by 26.1% and 15.7%,respectively (Table 8.35).

2. Sea transportation2. Sea transportation2. Sea transportation2. Sea transportation2. Sea transportation

Efforts to improve sea transportationremained directed at creating an integratedshipping system. To enhance the quality ofservices to passengers, since January 1, 1985the Government has implemented a policy ofscrapping vessels reaching the age of 25 ormore. As a consequence of this policy, in thereporting year the number of vessels recordeddecreases-ocean-going vessels by 27.1%,local shipping by 11.0%, pioneer sailing by8.7%, and interisland shipping by 5.8%.However, traditional shipping vesselsincreased by 4.3% (Table 8.36).

Although the number of vessels decreased,the output of the sea transportation services

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increased significantly: ocean-going by 21.6%to 15,687 thousand tons; interisland shippingby 5.3% to 8,514 thousand tons; andtraditional shipping by 7.3% to 2,736thousand tons.

3. Air transportation3. Air transportation3. Air transportation3. Air transportation3. Air transportation

The policy on air transportation continuedto be aimed at enhancing air transportationservices and expanding flight networks,primarily by increasing the facilities and byrehabilitating infrastructure.

In line with efforts to encourage the flowof foreign tourists, flight frequencies wereincreased, particularly to Europeancountries, by 13 flights in a week comparedwith 4 in the preceding year. Furthermore,the expansion of international flightnetworks was carried out by opening suchnew lines as Denpasar - Honolulu - LosAngeles. In addition, in the reporting yearregional flights between Kupang - Darwinand Pontianak - Kuching were also opened.

The number of aircraft operated byscheduled airlines totaled 183 comparedwith 175 in the preceding year. Meanwhile,the number of turbo-prop and turbo-jetaircrafts increased by 6 and 2, respectively(Table 8.37).

With respect to infrastructure, in thereporting year several airports wereupgraded so as to accommodate largeraircrafts. Through these improvements, ofthe 168 airports, 5 could handle B-747aircraft, 9 could accommodate DC-10 andA-300 aircraft, 18 could handle DC-9aircraft, and 37 could handle F-28 aircraft.

In 1986/87, domestic and overseas air

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passengers increased by 0.6% and 1.4%,respectively, whereas domestic and overseasair cargoes increased by 11.0% and 1.1%,respectively (Table 8.38).

J. TJ. TJ. TJ. TJ. Tourism, Postal Services, andourism, Postal Services, andourism, Postal Services, andourism, Postal Services, andourism, Postal Services, andTTTTTelecommunicat ionelecommunicat ionelecommunicat ionelecommunicat ionelecommunicat ion

In the reporting year, policies on tourism,postal services and telecommunicationcontinued to be directed toward increasingforeign exchange earnings, expeditingcommunication services and expandingemployment opportunities. In the field oftourism, a number of new regulations onvisa, hotel, and travel services wereintroduced. In line with efforts to increaseforeign exchange earnings, overseas flightnetworks were expanded and entrance gatesfor foreign tourists were added.

With respect to the postal sector, servicescontinued to be enhanced by expandingpostal service areas, especially to remoteareas, and by improving the quality of postalletter services. Telecommunication serviceswere also upgraded by expanding thenumber of international and nationalnetworks as well as by increasing thecapacity of central automatic telephoneexchanges.

1. T1. T1. T1. T1. Tourismourismourismourismourism

Efforts to promote tourism, as one of thesources of foreign exchange earnings, wereconducted by expediting and increasingtourist flows. Accordingly, in the reportingyear, the Government improved facilitiescovering visa free-entry for Taiwan and Maltacitizens,36) and for foreign businessmen37)

and changed visa regulations regardingbusiness visits38) and Hong Kong citizens.39)

In addition, since December 1986, theGovernment has provided in-flight

immigration services on the Tokyo - Jakarta- Denpasar route.

Efforts to attract tourists were alsoimplemented by opening new air routes to theUSA, Australia, and Malaysia. Furthermore,Pontianak and Kupang airports as well asSemarang harbor were designated as entrancegates for foreign tourists.40) In the reportingyear, the Government adopted a newregulation concerning the operation andclassification of hotels, 41) as well as licensesfor travel agents.42) In addition, previous effortscontinued to be carried out in the areas ofdevelopment of infrastructure and facilities fortourism, promotion activities conductedthrough Indonesian embassies, andcooperation in tourism with internationaltourist institutions.

In 1986, the number of tourists visitingIndonesia increased by 10.1% to 825,035persons or 98.1% of the target. Comparedwith the preceding year, the amount offoreign exchange earnings increased by20.1% to $ 590.5 million (Table 8.39). Interms of foreign exchange earned, touristsfrom Japan (18.0%), Australia (10.3%), andthe USA (9.6%) were the largestcontributors.

To improve services rendered to theincreasing number of foreign tourists, the

36) Minister of Justice Decrees Nos. M.04-lZ.01.02,November4, 1986 and M.05- lZ.01.02, December 1,1986.

37) Minister of Justice Decree No. M.02-lZ.01.02, August1, 1986.

38) Minister of Justice Decree No. M.03-17.01.03, October30, 1986.

39) Minister of Justice and Minister of Tourism, Postal andTelecommunication Joint Decrees Nos. M.02-lZ.03.01and KM.40/HK.702/MPPT-86, July 19, 1986.

40) Presidential Decree No. 39, August 28, 1986.41) Minister of Tourism, Postal, and Telecommunication

Decree No. KM.37/PW.304/MPPT-86, June 7, 1986.42) Minister of Tourism, Postal, and Telecommunication

Decree No. KM.63/PW.102/MPPT-86, October 4, 1986.

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Government promoted hotel business byclassifying hotels, primarily in 10 touristareas. At the end of 1986, 281 hotels with22,999 rooms were classified as starredhotels; the number of travel agents increasedby 7.3% to 502.

2. Postal and postal account2. Postal and postal account2. Postal and postal account2. Postal and postal account2. Postal and postal accountservicesservicesservicesservicesservices

Improvements in postal and postal accountservices continued to be aimed at enhancingthe quality of services and expanding servicesto remote areas. Accordingly, 23 post offices,68 subsidiary post offices, and 145 auxiliarypost offices were built in 1986 so that the totalnumber reached 287, 458, and 1,780,respectively (Table 8.40).

In the meantime, the number of districtsreached by postal services increased by 2.8%to 3,433 or 97.0% of the total number ofdistricts; transmigration areas that could becovered increased by 19.5% to 619 locationsor 81.1% of total transmigration locations.Meanwhile, Express Mail Services (EMS),covering 10 countries, was established so asto boost fast postal service with foreign

countries. Through these efforts, theproduction of postal and postal accountservices increased - postal packages by 2.4%,postal drafts by 0.1%, postal accounts andchecks by 0.2%, and postal savings by 18.5%(Table 8.41).

3. T3. T3. T3. T3. Telecommunicationelecommunicationelecommunicationelecommunicationelecommunication

To enhance domestic telecommunicationservices, the Government made efforts toincrease the operation and capacity of STO.Furthermore, several types of communicationsystems were improved to increaseinternational telecommunications. Suchsystems are, among others, the sea cablecommunication system (Sistim KomunikasiKabel Laut or SKKL) connecting South EastAsia - Middle East - West Europe and theinternational direct dialing network(Sambungan Langsung International or SLI)outside Jakarta. In addition, the B2P PalapaSatellite was launched in the reporting yearto replace the B1 Palapa Satellite. Thisreplacement was intended to assure continuityof telecommunication services throughout thecountry.

In 1986, central telephone exchangesincreased by 1.6% to 704 and their capacityrose by 7.6% to 838,555 line units. Theseline units covered 2,044 districts (57.8%) oran increase of 2.2% compared with that ofthe preceding year (Table 8.42). Increasedservices occurred in the long distance directdialing network (Sambungan Langsung JarakJauh or SLJJ) by 3.7% to 112 cities, SLI by17.8% reaching 106 countries, the longdistance telephone network (SambunganTelepon Jarak Jauh or STJJ) by 47.1% to 687line units, public phones by 11.7% to 4,106line units, and the motor vehicle telephonenetwork (Sambungan Telepon KendaraanBermotor or STKB) by 122.4% to 4,513 lineunits. Other telecommunication facilities also

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registered increases, including the centraltelex (STX) by 13.3% to 34 STX and itscapacity by 17.5% to 16,200 line units,General Telex (Gentex) offices by 19.8% to242 offices, and telegraph offices by 0.9% to664 offices. Meanwhile, the services ofinternational telecommunications reached 29countries, birofax 21 countries, and packagedata communication network (SambunganKomunikasi Data Paket or SKDP) 19countries.

K. CooperativesK. CooperativesK. CooperativesK. CooperativesK. Cooperatives

In the reporting year, the policy oncooperatives continued to be aimed atenhancing the role and capability of thisinstitution. In this regard, the Governmentprovided more opportunities for cooperativesto conduct joint-venture business withnational private enterprises. This effort wasimplemented by providing the PMDN facilitiesto national private enterprises that involvedcooperatives in their business activities.43) Inassociation with this effort, the cooperativeshave made progress in several economicactivities, such as, trade, handicraft industries,and electricity.

In 1986, the number of cooperativesincreased by 8.3% to 30,446 units,comprising 7,350 village cooperatives units(Koperasi Unit Desa or KUD) and 23,096non-KUD. In line with the increased numberof cooperatives, cooperative membership alsorose, by 6.4% to 21.6 million; there were 15.7million KUD members and 5.9 millionnon-KUD members. In addition, fundsaccumulated from the deposits of cooperativemembers increased by 133.0% to Rp 414.9billion. However, their turnover decreased by

34.4% to Rp 1,452.9 billion, brought aboutby declining activity, especially in theagricultural sector.

The role of KUDs in the agricultural sectorwas primarily reflected in their participationin food supply and marketing. In thereporting year, the number of KUDsparticipating in the procurement of paddy/rice declined by 4.3% to 1,992 units andthe amount of rice purchased declined by8.0% to 1,362.9 thousand tons. Thisdecrease in purchase was due to an increasein the market prices of paddy/rice whichencouraged farmers to sell their paddy/ricedirectly to the market.

In an effort to support agriculturalproduction, KUDs carried out thedistribution of fertilizers and pesticides. Inthe reporting year, 2,192 KUDs distributed448.6 thousand tons of fertilizer and 751KUDs distributed 360.4 thousand liters ofpesticide.

To promote its business activities, KUDsparticipated in the marketing of output ofsmallholders’ estate product, livestock, fishery,and handicrafts. In the smallholders’ estatesub-sector there were 194 KUDs marketing57.8 thousand tons of copra and 125 KUDsmarketing 2.7 thousand tons of cloves.

In the smallholders’ livestock sub-sector,cooperatives were engaged in variousactivities covering the distribution ofintermediate inputs for farming, such as,farming equipments, food and medicalsupplies for livestock. In addition,cooperatives also conducted the marketing ofdairy products. In 1986, the number ofcooperatives and their members activelyengaged in smallholders’ livestock subsector,remained unchanged, namely 494 units and53.9 thousand members; their turnover

43) Supplement to the Presidential Decree No. 22, May 31,1986.

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declined by 3.3% to Rp 89.6 billion. Thenumber of livestock cooperatives handlingmilk cows and marketing milk also remainedunchanged, namely 161 units. In thereporting year, the number of cooperativesactively engaged in smallholders’ fisherysub-sector remained almost unchanged,namely 669 units with 153.4 thousandmembers, whereas the their turnover reachedRp 88.8 billion.

The smallholders’ handicraft cooperativescontinued to develop as reflected in the riseof the number of the cooperatives by 28% to1,010 units with 199.9 thousand members.The favorable developments was also reflectedin an increase in their turnover, by 41.6% toRp 341.0 billion.

The KUD activities in distributingelectricity to villages were conducted, among

other way, through cooperation with PLN.In 1986/87, 617 KUDs of 20 provincesacted as electricity distributors to 907,714houses covering 1,644 villages.

In 1986, credit extended by KUDs topetty traders in villages in the form of KCKsteadily increased, although the number ofKUDs channeling KCK decreased by 2.0%to 5,476 units. The decrease wasattributable to the new classification ofKUDs channeling the KCK.

At the end of March 1987, bank creditsextended to cooperatives amounted to Rp349, billion, comprising Rp 75 billion ofinvestment credits and Rp 274 billionof working capital credits. The abovecredits were extended to KUDs andnon-KUDs in the amount of Rp 290billion and Rp 59 billion, respectively.

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