4. domestic sales permitted for companiews producing compnents 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 yearsfor 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 circumbscribed 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.