INDONESIA

A nation in Waiting-

Siddharth Dasgupta – 09EM 033Ravi Sharma – 09EM 028Kaushal Misra – 09EM 016Amit Mitroo – 09EM 004Amit Tyagi – 09EM 005Manoj Kumar – 09EM 018Anurag Saxena – 09EM 009

About the country

• Land of Islands• World’s fourth most populous nation• Secured Independence after World War II• Capital – Jakarta

International Relations• A cornerstone of Indonesia's contemporary foreign policy is its

participation in the Association of Southeast Asian Nations (ASEAN)

• It was then the founding member with Thailand, Malaysia, Singapore, and the Philippines.

• Indonesia also was one of the founders of the Non-Aligned Movement (NAM) and has taken moderate positions in its councils

• As NAM Chairman in 1992-95, it led NAM positions away from the rhetoric of North-South confrontation

• Indonesia continues to be a prominent, and generally helpful, leader of the Non-Aligned Movement

Economy of Indonesia

• Indonesia is the largest economy in Southeast Asia and also a member of G-20 major economies

• It has also met three times at heads-of-government level: Washington, D.C. in November 2008, London in April 2009 and Pittsburgh in September 2009.

• . Collectively, the G-20 economies comprise 85% of global gross national product, 80% of world trade (including EU intra-trade) and two-thirds of the world population.

Export & ImportIndonesia's main export markets according to report 2005:• Japan (22.3%)• United States (13.9%)• China (9.1%)• Singapore (8.7%)

Export & Import Contd..Indonesia's main import markets according to report 2005:• Japan (18.0%)• China (16.1%) • Singapore (12.8%).

In 2005, Indonesia ran a trade surplus with export revenues of US$83.64 billion and importexpenditure of US$62.02 billion. The country has extensive natural resources, including crude oil, natural gas, tin, copper, and gold. Indonesia's major imports include machinery and equipment, chemicals, fuels, and foodstuffs.

Economic Crisis in Indonesia

Crisis Period• In the 1960s, the economy deteriorated drastically as a result

of political instability, a young and inexperienced government, and economic nationalism, which resulted in severe poverty and hunger.

• and the 1970s oil price raises provided an export revenue windfall that contributed to sustained high economic growth rates. Following further reforms in the late 1980s, foreign investment flowed into Indonesia, particularly into the rapidly developing export-oriented manufacturing sector, and from 1989 to 1997, the Indonesian economy grew by an average of over 7%.

Crisis continued….

• Indonesia was the country hardest hit by the East Asian financial crisis of 1997–98. This occurred as a result of decline in the value of money. Against the US dollar, the Rupiah dropped from about Rp. 2,600 to a low point of 14,000, and the economy shrank by 13.7%.

• GDP growth, however, exceeded 5% in both 2004 and 2005, and is forecast to increase further however the growth rate have not been able to make any significant impact on the unemployment, and stagnant wages growth and increases in fuel and rice prices have worsened poverty levels.

• Todays’s exchange Rate:

1 Indonesian rupiah = 0.000106 U.S. dollars

About the central bank Indonesia: Bank Indonesia

BANK INDONESIA HAS ONE SINGLE OVERREACHING OBJECTIVE

to establish and maintain rupiah stabilityThis objective incorporates two key aspects:

first is a stable rupiah for goods and services, reflected by the inflation rate.

The second is exchange rate stability against other foreign currencies, which is reflected by rupiah performance against

other foreign currencies.

Banking Institution of Indonesia

• The functions of banks in Indonesia are basically as financial intermediary that take deposits from surplus units and channel financing to deficit units.

• According to Indonesian banking law, Indonesian banking institutions are typically classified into commercial and rural banks.

• Commercial banks differ with rural banks in the sense that the latter do not involve directly in payment system and have restricted operational area. In term of operational definition, bank in Indonesia are classified into non-syariah and syariah-based principles commercial banks

BANKING INSTITUTION IN INDONESIA.doc

Monetary and Fiscal Policy Coordination

• In Indonesia, with demand pull co-existing with push factors, it is vitally important for the Government and Bank Indonesia to coordinate their actions through integrated macroeconomic policies if inflation targeting is to be effective.

At the policy making level, Bank Indonesia and the Government address this need by holding regular

Coordination Meetings to discuss the latest economic developments Similarly, Bank Indonesia is also frequently invited to Cabinet Meetings

chaired by the President of Indonesia to provide opinions on macroeconomic and monetary developments relevant to achievement of the inflation target.

. Coordination of fiscal and monetary policy also takes place in the joint formulation of the State Budget Macro Assumptions deliberated with the Indonesian Parliament.

Trivia Changes the Indonesian economy has undergone are dramatic

As background. From December 1996 until July 1997, the Rupiah traded in a narrow range of around 2400 to the U.S. dollar.

The consumer price index (CPI) provided by the Bank of Indonesia shows stable prices for each of four aggregates-- food, housing, clothing, and health. In July 1997, the Thai Bhat nose-dived and the Rupiah followed

suit. It appears in the August 1997 entry where the Rupiah is reported at 3035

to the dollar. Although this was a sudden depreciation on the order of 20 percent, prices rose only with a lag.

Throughout the remainder of 1997, the Rupiah continued to depreciate against the dollar and (except in November) against the Yen. The food CPI

rose from 105 to 120-- a noticeable increase but not an overwhelming one. The CPI for housing, clothing, and health care rose yet more

modestly. On the economic policy front, the IMF approved a $10 billion loan while

The World Bank pledged $4.5 billion for a three year program.

Key economic indicators

Key economic indiactors.doc

Economic Reform after the slow down in 1997

• Economic reform in Indonesia after the Asian currency crisis is often discussed in parallel with Thailand and South Korea, which were alike hit by the crisis. It should however be noted that what happened in Indonesia was a change of political regime from authoritarianism to democracy, not just a change of government as seen in Thailand and South Korea.

• Indonesia’s post-crisis reform should be understood in the context of dismantling of the Soeharto regime to seek a new democratic state system.

Growth, Investment and Employment

• Growth deceleration: The annual growth rate in 2005 was 5.6 percent, the highest since the crisis that began in mid-1997 (7.6 percent in 1996). However, the quarterly profile has been slowing since late 2004, largely due to weaker investment, especially towards the end of 2005. A series of fuel price increases, delays on investment climate reforms, and mid-year financial market jitters hurt investment. Reflecting weaker investment, the growth of capital imports fell significantly from 19 percent (yoy) in Q3 to 0.6 percent in Q4.

Contd….

Government consumption and net exportspropped-up growth: In Q4 2005, government consumption was up 30 percent (yoy) due to countercyclical fiscal policy. This stimulus was aided by surprisingly strong net exports (exports minus imports) for the first time since Q3 2003. This was driven by

steady growth in exports and a fall in oil and gas imports.

Contd….

• Variable growth: However, recent growth has been uneven. Non-oil and non-tradable sectors have been the main drivers for the past few years. For example, in 2005, the non-oil and gas sector grew by a relatively robust 6.5 percent; in contrast, oil and gas contracted by 3.3 percent. This decline in the oil and gas sector was reflected in other tradable sectors, which only increased by 3.5 percent in 2005, a rate below that of any non-tradable sector. Despite the significant increases in international oil and gas prices, low investment has continued to reduce production levels in the oil and gas sector

Contd….

• Rising Unemployment: Despite the relatively strong economic growth (especially non-oil and gas), the unemployment rate increased by 2 percentage points between2001 and 2005 reaching 10.3 percent. The corollary is that labor productivity (GDP per worker) accelerated from 3.4 percent growth in 2002 to 4.2percent in 2005. On the one hand, the improvement in labor productivity contributes to growth acceleration; on the other, it reduces job creationand remains a concern.

A note to conclude..

• Indonesia is made up of the islands of the former Dutch East Indies, a colony established by the Netherlands to control the important spice trade and take advantage of the fertile tropical soil. Indonesia's first 15 years after gaining independence in 1949 were marked by high inflation and very little development beyond the economy inherited from the colonial system, which was heavily dependent on agriculture.

• Indonesia has gone through 6 5-Year Development Plans, known by the Indonesian acronym Repelita.

The first 5-Year Development Plan (Repelita I) started in 1969 and emphasized rebuilding the economy

Repelita II, starting in fiscal year 1973-74, tried to increase the standard of living through better food, clothing, and housing, infrastructure

Repelita III, beginning in fiscal year 1978-79, introduced the "trilogy of development" of high economic growth, national stability, and equitable distribution. Self-sufficiency in food and the promotion of industries processing basic materials into finished goods were also objectives.

Starting in fiscal year 1984-85 Repelita IV continued to emphasize self-sufficiency in rice and industrial machinery.

. Repelita V, from fiscal year 1989-90, stressed rapid development with emphasis on the industrial and agricultural sectors.

. The sixth 5-Year Development Plan (Repelita VI) began to encourage foreign investment and abandoned policies of high tariff barriers, heavy regulation, and import substitution (manufacturing consumer goods domestically to reduce imports).

Finally…

Surveys of business travelers in Asia regularly rank Indonesia as one of the most corrupt places to do business. Corruption has interfered with recovery as well, as the IMF and the World Bank stopped payments in 1999 after a private bank was discovered to have funneled payments from the government to the former ruling political party. In September 2000, the Supreme Court convicted the son of former president Suharto for corruption in a real estate deal, but he vanished before he could be jailed. It is believed that Indonesia is becoming increasingly involved in the shipment of heroin from the Golden Triangle in mainland Southeast Asia.