Survey of recent developments

Two major factors, one internal and one external, shaped developments through the middle of 2004. The internal factor was the national election process, which led to a realignment of political power among the parties in the legislative elections in April, and offered the prospect of even greater changes in the presidential election to follow. The external factor was foreign capital, which readily flowed into Indonesia in the early months of 2004, reflected in a series of record highs in the Jakarta Stock Exchange index, but then seemed to waver in May, perhaps because of the growing threat of higher US interest rates, uncertainty about the election, or concern about inflation. Sharp declines in the value of the rupiah and local stocks mirrored similar though less severe developments throughout Southeast Asia and around the globe. The imminent first-ever election of an Indonesian president through a direct vote by the public raised hopes of change for the better, particularly with respect to governance and the performance of the economy. However, the structural factors that have held back economic growth in Indonesia since the crisis of 1997-98 will not change overnight. The new president could have a popular mandate, but will have to assemble a coalition in a parliament in which power will be more fragmented than ever. As the presidential election approached, polls showed the electorate's top priorities to be an improved economy and reduced corruption. However, recent months have witnessed several steps backward, as interventions in domestic trade and the escalation of fuel subsidies have created costly inefficiencies and new opportunities for corruption. A recent proposal to establish a vast new social security system monopolised by the government is also problematic in an environment in which governance remains weak. Personal income tax changes being considered by the Ministry of Finance could significantly reduce government revenues, an outcome the government can ill afford. Despite enactment of a host of new laws in the last six years in such areas as anti-monopoly, bankruptcy and anti-corruption, as well as the initiation of a long-term judicial reform process, recent events have shown that the legal system remains a major source of uncertainty in the business environment.

Survey of recent developments

Marks¹

2004

Fiscal sustainability and solvency: theory and recent experience in Indonesia

Marks¹

2004

A major challenge for Indonesian economic policy makers is to avoid the recurrence of conditions that could trigger a new economic crisis. One of the important dimensions of this challenge will be to conduct fiscal policy in a way that is sustainable, given the level of interest rates and the rate of growth of the economy. This paper synthesises various approaches to the measurement of fiscal sustainability that have appeared in the economic literature, relates these measures to the fundamental concept of fiscal solvency, and applies the framework to Indonesia over the period 1991-2003. The domestic and foreign debt positions of the central government are treated separately, to capture the influence of exchange rate changes on the relative costs of domestic and foreign borrowing. The empirical analysis indicates that Indonesia has met the fiscal sustainability criterion in recent years, except when the rupiah has depreciated heavily.

Survey of recent developments

Soesastro

Atje

2005

The composition of the incoming cabinet has been a disappointment: the president's clear election victory seemed to give him the opportunity to appoint a more strongly reformist group of ministers. The new government says it intends to involve the private sector heavily in infrastructure provision, and that it recognises the need to improve the business environment, but there has been little concrete progress so far, and it has yet to show the will and capacity to do what is required. In late December Aceh province was devastated by an earthquake and a catastrophic tsunami. About a quarter of a million Indonesians were killed and countless others injured. Vast numbers have lost their livelihoods, and material damage is estimated at $3 billion, although the natural gas producing facilities remain intact. The international community showed itself to be favourably disposed to the incoming government, and committed generous disaster assistance. The economy grew increasingly rapidly in 2004, and investment spending has at last begun to record sustained high rates of growth. The budget outcome for the year is expected to be reasonably close to plan, despite the previous government's failure to reduce the enormous waste resulting from electricity and fuel price subsidies. Monetary policy was tightened toward the end of the year in response to accelerating inflation. A deposit insurance agency to be established under newly enacted legislation is unlikely to be able to prevent banking collapses, or the transfer of the resulting losses to the general public; the legislation seems merely to codify most of the actions taken on an ad hoc basis in 1999-98 when the banking system collapsed. Meanwhile, yet another banking scandal has led to the closure of a private bank, after a seemingly unwarranted delay by the central bank. The government has announced its intention gradually to adjust electricity and fuel prices upwards. The Constitutional Court has annulled a new electricity law allowing greater private sector participation and competition in this sector, however. Similar court actions now seem likely whenever the government enacts laws aiming to enhance efficiency through these means. After less than four years of decentralisation, the underlying laws have been replaced. The new laws can be interpreted as an attempt to shift government authority back towards the centre, but there has also been an attempt to redress the regionally inequitable fiscal impact of current revenue sharing arrangements.