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Economic Recovery

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General View

Since the middle of 1997, the national economic working system has slowed down and in 1998 it continued to worsen in a wider scale with higher intensity. However, at the end of 1998 there was promising indication for economic recovery. National economy at that time remained to be unstable as shown by the rapidly rising price (inflation) of goods, poor balance of payment and a very sharp economic contraction. This economic crisis was mostly due to the prolonged exchange rate crisis of the rupiah currency, the crisis of the national banking and private foreign loans, and unfavorable socio-political events. The impact of the ineffective economic working system upon the people at large ranged from the increase of unemployment since many business firms reduced or even stopped their activities, the decline of the people's welfare due to the significant drop of the people's buying power, to the aggravating social unrest. 
In the effort to overcome the economic crisis, the government with technical and financial aids from international institutions and friendly countries coordinated by the International Monetary Fund (IMF), initiated the program for economic reform and stabilization. To carry out the program, in the fiscal year of 1998/1999 policy initiatives have been made in fiscal, monetary and banking field, and balance of payment as well as the real sector. The main objective of the effort is to activate the economic wheel without negative effect on inflation and balance of payment. To put this into action it needs a solid coordination of fiscal, monetary, balance of payment and the real sector policies. 
In 1999/2000, the effort is continued and intensified so that in this fiscal year the national economy is showing a trend to recover. Today the government is implementing an economic agenda which include: (i) the realization of natural and stable exchange rate of the rupiah currency; (ii) control of interest rate and inflation; (iii) reconstruction and improvement of the banking system; (iv) settlement of private foreign loans: (v) acquisition of nine basic provisions and medicine in adequate quantity and affordable by the people; and (vi) regeneration of production activities, especially those based on the people's economy and is export oriented. 
The policy implemented during the reform era has shown a promising progress as reflected in the indicators of macro-economics since the fourth quarter of 1998. In October, November and December of 1998, the inflation rate dropped significantly to be minus 0,27%, minus 0.08% and minus 1.42%. Besides, the exchange rate of rupiah currency became better and relatively stable. The position of the balance of payment tended to be stronger and foreign exchange reserves remained safe, interest rate dropped, and the combined shares prices index increased although there was a fluctuation. Based on such indicators, the national economy in the fiscal year of 1999/2000 was estimated to recover with the growth rate of about 0 (zero) percent, a significant progress compared with the contraction rate of around 12.0 percent in 1998/1999. Meanwhile the inflation rate is estimated to be controlled at about 17.0 percent, a drop compared with the estimate made in the 1998/1999 State Budget of about 66.0 percent. In the middle of 1999, the economic growth-rate, particularly in the second quarter of 1999, is estimated to be positive. In March, April and May, the inflation rate respectively showed minus 0.18%. minus 0.68% and minus 0.28%, while the banking interest rate also started to decrease. 
The contraction in Gross Domestic Product (PDB) in the year of 1998 (13.68%) or the 1998/1999 (-15.27%) is higher than what has been projected. But, if we noted its development in tri monthly base, it is found that the process of contraction has surpassed the lowest point. In fact, the contraction in GDP based on basic constant prices of 1993 has increased from minus 9.04% in the first quarter of 1998, to minus 7.02% in the second quarter, minus 4.60% in the third quarter, and minus 0.27% in the fourth quarter. In the next program it became plus 1.34% on the first quarter of 1999. The indication proves that the endeavors conducted by the government has brought positive outcome. 

The State Budget 
Efforts to revitalize the economic working system needs support of the State Budget. According with the letter of intent signed with IMF on January 15, 1998 which contained 50 points of agreement, the 1998/1999 State Budget of Rpl33,491.9 billion was revised to amount to Rpl47,220.8 billion. To strengthen the economic recovery, in April 1998 the government signed an additional memorandum with IMF containing additional agreement. 
Various riots broke out in May 1998 and the political change reached the peak with the replacement of national leadership on May 21, 1998, resulting in worse economic working system and gloomy prospects. The network of goods distribution did not function, economic activities including export were hampered, trust on business activities declined. Consequently the exchange rate of the rupiah currency suffered from bad depression and the inflation rate sky rocketed. The condition urged the government to make another additional memorandum with IMF in June 1998. The agreement among others emphasizes the need of organizing a social safety net and of revising the 1998/1999 State Budget since the earlier assumption was not suitable anymore with the situation. With the approval of the House of Representatives, in July 1998 the government revised the 1998/1999 State Budget which was originally in balance at Rpl47,220.8 billion, to become Rp263,888.1 billion or an increase of 79.25 percent. The rise of the State Budget was due to the change of exchange rate of the rupiah currency from Rp5,000 to Rp 10,600 for 
one US dollar, which influenced significantly the income from oil and gas, and development revenue as well as the payment of foreign debts. 
The deficit realization of State Budget of 1998/1999 in the amount of 2.9% from GDP is lower than the projection of State Budget of 1998/1999 (8.5%). Meanwhile, the estimate of the surplus realization on the current transactions and increase of foreign exchange in the year of 1998/1999 in the amount of US$4.5 million and US$9.9 million respectively, are better than the projection of the State Budget of 1998/1999 (US$1.4 million and US$5.3 million respectively). 
The policy has in general been able to recover the economy, which among others is indicated by the increasingly stable exchange rate of the rupiah currency to a more realistic and new balance, controllable inflation rate and the decline of interest rate. Meanwhile the development of oil price at the international market tended to decline due to over-supply and less demand. Considering such factors, the basic assumption used in formulating the 1999/2000 State Budget is the zero growth-rate, inflation rate of 17.0 percent, crude oil price of US $ 10.5 per barrel, oil production of 1,520 thousand barrels per day, and exchange rate of Rp7,500 per US dollar. With such basic assumptions and in view of the factors related with the revenue and the expenditure, the 1999/2000 State Budget is decided to be Rp219,603.8 billion or a rise of 83.2 percent from that planned in 1998/1999. 

Bank Restructuring 
During the economic crisis, the Indonesian banking sector was confronted with serious problems. At the end of 1997 and at the beginning of 1998, the people's trust on banking dropped sharply, depositors and bank clients withdrew their money from banks with the consequence of bank liquidity. This tendency intensified the people's mistrust and if it were not properly handled, it would make the national banking system collapse, which at the end would affect the payment system and economy in general. 
To avoid it, at the end of January 1998 safety policy was taken by providing guarantee to depositors and bank creditors. The policy enabled the troubled banks facing the depositors rush to obtain liquidity aid (BLBI) from the central bank. Bank Indonesia. To guarantee depositors fund, in 1998 the government issued a bond to Bank Indonesia as much as Rp 164,536 billion for liquidity aid which was spent by Bank Indonesia for the banking circle. 
In line with the existence of the guarantee, the Indonesian Bank Restructuring Agency (IBRA) was established. The banks in difficulty with liquidity, especially those given more than 500% of the total asset, were placed under the Agency's control. As a follow-up, in April 1998, as many as seven banks regarded not solvent were closed. In August 1998, the other three banks were closed and four were taken over by the government. In general the guarantee policy and recovery measures gradually convinced the people about the safety of their money in the Indonesian banks. However many banks were already in bad condition, especially suffering from capital shortage, thus the national banking could not function properly as the source of economic financing. The economic stagnation complication must be coped with the bank restructuring program designed to enable the national banking function and activate the economy as well as create employment opportunity. To perform the restructuring program, the government took basic steps, consisting of two fundamental policies. First, reconstruction of a sound banking system to support recovery and revival of national economy through (a) recapitalization, (b) improvement of acts and regulations, and (c) improvement and enforcement of principles regarding precaution. Second, settlement of banking problems through immediate action for banking recovery. 
In view of the need for reliable banking service to revive the economy, the government decided to implement the recapitalization program for national banking. The program requires banks to arrange a clear working plan to be approved by Bank Indonesia, and to provide at least 20% of the total recapitalization need. The government will prepare the remaining 80%. The government fund for the recapitalization program constitutes capital sharing which can be released at the price favorable to earn added value. The sharing is conducted by conversion of the liquidity aid from Bank Indonesia into government equity and bond, so that the government only takes care of the interest. At the same time the government will receive revenue from the sale of assets, managed by IBRA and the previous owners of "BTO" (Banks which have been taken over by the government) and the "BBO" (Banks Operationally suspended, which actually means "closed down"), to pay the interest. Based on due diligence, recapitalization fund needs an amount of about Rp351,625 billion for recapitalization of State- owned banks about Rp233,254 billion, private banks about Rp24,533 billion, BTO in 1998 about Rp80,475 billion, BTO in 1999 about Rpl2,112 billion, and Regional Development Banks about Rpl,231 billion. 
To finance the recapitalization of II private banks and 12 BPDs (Regional Development Banks), the government has issued a bond of Rpl03,831 billion. When added to the bond already issued by the government to cover liquidity aid from Bank Indonesia for the guarantee of an Rpl64,536 billion loan, the entire bond amounts to Rp268,367 billion. For the issuance of the bond, the government is obliged to pay as much as Rp34 trillion for the interest. In the view of the fact that the House of Representatives has approved that part of the interest is included in the State Budget, in the 1999/2000 State Budget there is an allocation of Rp 17 trillion for repayment of the interest of government bonds for recapitalization of banks. The remaining Rpl7 trillion will be obtained from the sale of assets managed by IBRA. 

Elaboration of Activity List/Project List by Region 
In line with the demand of the people for the intensification of regional autonomy, starting fiscal year 1999/2000 a wider authority and independence is given to the local government region to decide on the use of routine budget and development budget through the elaboration of DIK (Activity List) and DIP (Project List) by the province. The elaboration of DIK in the province makes the fund of routine budget to be used optimally in line with the local need so that public service will improve. Besides, the wider authority in planning and managing local governments projects will increase the participation of the regions in development activities, being the subject as well. The reason is that the object of development. As the Regional Administration is more aware of the economic condition of its region, thus the identification of problem areas and the designing of a development plan could be done more accurately. 

Decentralization of Authority of DIK Design 
So far the arrangement of routine budget to accommodate the need of offices/working units is under the responsibility of the ministry/institution which are located in the Capital City. together with the Directorate General of Budgeting of the Ministry of Finance. The mechanism is not conducive to the efficiency of allocation and spending of the routine budget. It is caused, among others, by the tendency to allocate fund for the interest of ministries offices, while the data base for the calculation of routine budget is less accurate since the data compilation is done by ministries/head offices. Besides, the index of the price in the capital city is not suitable to the regional condition, and the decision of activities for regional offices is not in line with that for ministries/head offices. The increase of activities in formulating budget makes it impossible to be completed within a relatively short time and by few personnel. 
Such consideration has encouraged the Directorate General of Budget (DGB) and the ministries/institutes to expand the authority of routine budget arrangement to the provincial authorization of routine budget formulation to the provincial offices of the DGB together with the provincial technical offices of ministries/institutes. 

Financial Balance between National and Regional Administration 
An important step in the organization of regional autonomy is the issuance of Law No. 25 of 1999 on the Financial Balance between National and Regional Administration and Law No. 22 of 1999 on Regional Administration. Law No. 25 of 1999 regulates the balance of fund namely the fund received from the State Budget allocated for the regions to finance regional need in the implementation of decentralization. There are three sources of financing for the Regional administration coming from the State Budget, namely: (a) fund for the region from Regional Right for Land and Building Tax and revenue from natural resources: (b) general allocation fund, and (c) special allocation fund. The extent of task/function of government which has not been rendered or transferred from the national administration to the regional administration will a great deal determine the amount of budget to be allocated in the State Budget to support the administration activities carried out by the regional administration. Thus. the financial balance between national and regional administration is subject to the balance of authority between the national and the regional administration. 

Social Safety Net Program 
In line with the Decree of the People's Consultative Assembly No. X/MPR/1998 about the Fundamental Principles of Development Reform to Recover and Normalize the State Life as the State Policy, the State Budget is directed to be used for protecting the groups of people which suffer most from the impact of the economic crisis, by means of the Social Safety Net Program. This program comprises four elements. namely: food stock resilience, creating employment opportunity. social protection particularly for education and health, and development of small businesses. Actually, the Social Safety Net program has already been implemented by the government in the form of Presidential Aid for Villages and Poorest Villages. Education and Additional Food Program for Primary School Students. However, owing to the economic crisis, the program is more intensified and is directly focused on the poorest people with short-cut procedures. 

The Social Safety Net Program is not merely consumptive, since the aid is given selectively to the needy members of the society as well as allocated for productive sectors, especially of small businesses. Thus the program is expected to play a role as the source of national investment, which would gradually be able to accelerate the national economy, which in turn gives contribution to the state revenue through the tax and non-tax revenue. 

 People's Welfare and Poverty Eradication

 
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