Belt-tightened Indonesia retools economic plan as oil profits fade
Indonesia, which depends on oil for more than 60 percent of its export earnings and is one of the world's most indebted nations, is radically rethinking its economic planning due to the drop in crude-oil prices.
The government, a member of the Organization of Petroleum Exporting Countries , reacted to last year's $5-a-barrel oil-price decline with a series of decisive , if controversial, measures.
In late March, the rupiah was devalued by 27.5 percent against the dollar. In May, more than 40 development projects - with a total value in excess of $20 billion - were shelved, postponed, or refinanced. These measures, though politically unpopular, won the praise of many institutions, including the World Bank, from which Indonesia is the third-largest borrower in the world, after India and Brazil.
''They saw the problem and took decisive remedial action,'' says a World Bank official.
Indonesia's prudent monetary policies, the official says, indicate its leaders are concerned not to get caught in the cycle that has afflicted many other debtor nations: borrowing to pay for more borrowing.
But despite these measures, says Finance Minister Ali Wardhana, Indonesia's borrowing requirements over the next few years will be substantial. The country's debt-service ratio in the year ending in March, he predicts, will reach 24 percent of total export earnings.
The World Bank sees little cause for concern. It says the country has a healthy balance of payments. Inflation has been kept down to around 10 percent.
The government has taken steps to attract funds for development from other sources in order to compensate for the drop in oil-export revenue. These include widening the tax bracket (at present non-oil taxes account for only 6 percent of national income) and providing more incentives for savers. The latter measure has succeeded in reversing a pre-devaluation outflow of funds and attracted more besides.
The World Bank says the fiscal-year deficit will be $5 billion or less - well below an earlier government prediction of an $8 billion deficit. Nonetheless, Indonesia's economy has a number of problems to overcome. Government economists have been forced to realize that the oil boom, which saw Indonesia's oil revenue rise from $388 million in 1969 to $10 billion in 1979, is finished.
Indonesia has always been committed to a long-term strategy, much of it based on continued high revenues from oil. This March the country enters its fourth five-year plan, which reflects scaled-down ambitions.
In each of the next five years, the country hopes to achieve 5 percent annual growth, which is modest compared with the 10 percent to 12 percent growth of the 1970s.
To do this will require major achievements in Indonesia's non-oil export sectors: There must be an annual rise in non-oil exports of at least 13 percent. Some industries, such as liquefied natural gas, will have to carry more of the earnings. At present, the market for other non-oil commodities like timber and rubber is healthy, though whether this continues will depend largely on revival of industrialized-world economies.
But this will not in itself be enough. Indonesia will have to develop other export areas. In particular, it will have to harness its vast mineral wealth.
Much of Indonesia's industry has been neglected during what one minister has called ''the drug years'' of the oil bonanza. Much will depend on the ability of industry to attract capital investment, the majority of which will not come from overseas but from private savings. Harnessing these savings will be crucial if government growth targets are going to be achieved.
Indonesia also must try to keep down its level of imports without harming domestic growth. While one of the major achievements of the present government has been to help the country become nearly self-sufficient in rice, one bad drought could mean massive food imports.
There are other imponderables: Exporters must find ways of overcoming the constraints of government red tape, which inhibits much of Indonesia's economic and political structure. The government must be careful about keeping wages at their present low levels. Perhaps the most important question of all is whether the economy, in its new phase of restricted growth, will be able to absorb an estimated 1.5 million people who annually enter the labor market.
Indonesia's planners originally perceived the country's development in three phases: The 1970s was the period of growth; the early 1980s, consolidation; and by the late '80s, there would be ''economic liftoff.'' Now projections are more modest.