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... d 2 %. Furthermore, the Board of Governors, in consideration of condition on market liquidity and base money target, predicts that one month SBI interest rate will be around 10 %- 12 %. Bank Indonesia will keep monitor interest rate development in line with price and exchange rate development. Over the past few years, Indonesia went through essential reforms leading to a prospective recovery. Prior to 1997, slowing economic growth in Indonesia heightened political unrest.
This lead to growing tensions and popular disaffection with the status quo. These tensions in short term attributed to a more difficult and aggravated economy. The economy suffered with falling investment, collapsing private consumption and lower government spending. In addition to a heated crisis state, the rupiah was rising and falling. As the rupiah collapsed, inflation rose, to about 28 %. The rate would even be worse if the government imposes a currency board, which would lead to further speculative pressure on the rupiah.
The economy contracted over the next 2 years against a background of hyperinflation and growing poverty. President BJ Habibie found it increasingly difficult to please all the different constituencies whose support was important to his political survival. As for GDP, in the first quarter of 1999 there was a decline in output of 6. 2 % compared to 1998. Reports suggest that these figures underestimated this decline since they included a barely credible 5 % growth rate for agricultural output, hit by economic crisis (which made imported inputs more expensive and credit hard to come by) as well as by an El-Nino induced drought. Declines were formatted at 17. 1 % and 17. 9 % for industry and services respectively, compared with a relatively small contraction of 0. 5 % for agriculture. Real GDP was expected to fall by 15 % in 1998 and fall sharply in 1999.
By May, 1998, inflation had reached a year in year rate of 52 % and officials were predicting it to be 80 % by the end of the year. Inflation was impacted by the sharp depreciation of the rupiah on the prices of imported goods, the affect of the drought on food production and the appearance of production and distribution bottlenecks. This combination ultimately affected prices. The budget for 1998 - 99 was revised in January, 1999 but not formally revised since. Although the IMF conceded in April that the deficit would reach 3 % of GDP and by mid-June its Asia director admitted that the deficit would be well above 4 %. The most important component of revenue, non-oil domestic receipts, which had been budget ted to account for nearly 70 % of the total, is collapsing across the board as a result of the severe recession.
Some savings will be made through cutbacks in spending on infrastructure, but a deficit of at least 6 % of GDP is still in prospect for the 1998 - 99 year, which would require only a slightly larger amount of foreign funding than the $ 6. 45 bn projected in the first budget revision. Political reform was inevitable with an approaching election shadowed by such an unstable economy. The armed forces supported Presidential efforts recognizing the economic crisis must take priority and that political differences must be put aside. The counter argument is that the confidence required to handle the economic crisis will only come once the issue of political legitimacy has been settled. Abdurrahman Wahid and Megawati Soekarnoputri were elected President and Vice president respectively in October, 1999.
This is the political transition economists predicted would begin economic recovery and build a new foundation for growth in Indonesia. Indonesia has given up control over East Timor following a referendum for independence in the territory and a violent backlash by pro-integration military supported by Indonesian forces. Recovery will be slow although the economy will return to growth in 2000. Based on data showing that GDP rose in the 3 rd quarter of 1999 by 0. 5 %, the government forcast's a full growth in 1999 by 0. 1 %.
However, this would only be possible if several sectors, including manufacturing, construction and financial services record strong growth in the 4 th quarter. The EIU considers this unlikely and is therefore forecasting GDP to contract by 0. 7 %. However, on the assumption that both political and the policy enviroment will stabilize, there will be a return to growth for 2000, where GDP will expand by 4. 3 %. No loss of momentum is envisaged during the transition to a new government and bank and corporate restructuring policies have been further strengthened, due to implementation of new economic and financial policies.
The appointment of Kwik Kian Gie as coordinating minister for economic affairs is expected to encourage members of Indonesia's ethnic Chinese business community to repatriate the vast sums of capital they are believed to have moved offshore during the height of financial crisis. One of the first steps taken by Kwik was to release the audit report of Pricewaterhouse Coopers into the Bank Bali scandal, which the IMF had made as a condition for the resumption of loans suspended in September. Improved relations with the IMF should also enable the new government to negotiate some changes to the program to include its own policy priorities. These include the provision of increased state support for the agricultural sector and other social programs. Indonesia is South-East Asia's starkest example of the effects of depressed consumer spending, resulting from huge reductions in disposable income and tremendous price inflation. To counteract these effects, k the IMF recently inspired a deregulation package.
It included the following key factors: 1. tariff reductions on fish, chemical and metal products 2. distribution and wholesale trade opened to foreign-invested companies engaged in production, but only the sale of their own products. 2003 foreign companies will be permitted to sell direct to consumers 3. value-added tax (VAT) exemptions on exports expand, from 10 to 18 strategic product groups the new groups included are iron & steel, automotive components, machinery & components, jewelry, chemicals, rubber, mineral products and sheet plastic 4. domestic sales permitted for companies producing comments in banded zones of domestic sales do not exceed 50 % of realized export value 5. duty-free imports of machinery, equipment, and related goods and materials for a period of 2 years for all newly established industrial plants 6.
export taxes removed from Rattan, raw hide leather, mineral ores, cork and aluminum scrap 7. importation of wheat, wheat flour, soy beans, and garlic are permitted. Previously these commodities could only be imported by the National Logistics Agency. Another current key factor leading to the recovery of Indonesia's economy are the retail curbs set by the government. The government tightened restrictions on retailers, with foreign owned fast-food franchises hit the hardest. Because foreign-owned retailing is forbidden, franchising has been the side door for retailers.
This year, regulations circumscribed foreign-owned franchise ability to expand. These restrictions can only last about 5 years if Indonesia is serious about free trade. When retailers on any Asian country are expected to have unfettered access to the market of any other member. The out-look for Indonesia's economy is guardedly optimistic. The second half of 1999 has shown signs of recovery from the economic down turn that began with the crisis of 1997 - 1998. Inflation has been reduced to manageable levels of 8 - 9 %, after an annual rate of 64. 7 % in late 1998 and early 1999.
It is expected that inflation will be a moderate 4 - 5 % over the next two years. Gross Domestic Product growth is expected to be 1. 8 % in the year ending March 2000, with growth of 4 - 6 % over each of the next two years. Interest rates are also expected to decline over this period. Debt re-structuring is expected to continue as bank reforms are implemented. Exports should be strong, lead by the favorable oil market. These factors have resulted from a cooperative effort with the International Monetary Fund to provide the necessary infusion of foreign capital and the government of Indonesia to support the necessary market reforms to foster growth.
In contrast with these positive signs are several potential problems that have slowed recovery and threaten its continuation. The banking crisis caused by the Bank of Bali's payments to members of a leading political party has undermined confidence in the banking reforms undertaken as part of the recovery process. An immediate and transparent resolution of this controversy is necessary to prevent any disruption to the banking recovery necessary for successful completion of the recovery plan. An investigation by Pricewaterhouse Coopers has been conducted as a first step in the resolution of the controversy. The IMF will await the published results of that investigation before deciding on additional action it will take. At stake is the next installment of an IMF line of credit approved to assist with the recovery.
The political situation in Indonesia also remains tenuous. While the successful completion of the first free election in the past 30 years has been a source of hope and helped to bolster the international support to the Indonesian economy, there remain many questions about the stability of the government. The newly elected president, Abduhrhman Wahid is of infirm health and may not be able to serve out his full five year term. The role of the military is also a question.
Traditionally an active player in Indonesian politics, the military has apparently taken a back seat in the current electoral process. However, the fact that there are still factions that support the policies of ousted dictator Suharto contributes to instability in the political arena. There are also questions about what role the Islamic parties that contributed to Mr. Wahid's victory will play in future policy-making decisions. While both Mr. Wahid and his popular vice president Megawati Sukarnaputri are strong proponents of the separation of state and religion, the impact of such a strong special interest group cannot be ignored.
East Timor remains a potentially volatile situation. After a violent confrontation with the government, concessions were made that will lead to an independent government in that province. All of the details have not been completed, leaving the potential for a renewed crisis in the region. Instability exists in other regions of the country, which will need to be resolved by the new government if the economic recovery is to continue unabated.
The basic ground-work for recovery of the Indonesian economy has been completed. Continued political stability, successful completion of banking reforms and continued effective use of monetary and fiscal policy will be essential for full recovery to be realized. It is early in the process, but preliminary signs are encouraging. Bibliography:
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Research essay sample on Foreign Owned Economic Crisis
