1 December 1998
must continue economic reforms while safeguarding access to key export markets Back
Indonesia, in its worst economic
recession since 1963, must continue to implement reforms and stabilization programmes if
it is to revitalize its economy. For their part, Indonesia's trading partners should
resist domestic protectionist pressures and help Indonesia regain economic stability by
remaining open to the country's exports.
A new WTO report on Indonesia's trade
policies and practices states that the economic crisis which began in mid-1997 put an end
to 35 years of continuous economic growth. Inflation is expected to reach between 80 and
100% by the end of this year, up from an average of 10% during the years of high economic
growth. In the first half of 1998, Indonesia's GDP shrank by 12% and is expected to fall
by 10 to 15% for the year as a whole.
The WTO's report and a policy statement
by the government of Indonesia will provide the basis for two days of discussion at the
WTO on 3 and 4 December 1998.
According to the WTO's report, the
causes of the recent financial and currency turmoil can be attributed to both external and
internal factors. The sudden withdrawal by international investors from Asian financial
markets in mid-1997 was compounded by internal developments such as the growing
uncertainty about economic, social and political stability in Indonesia. The result has
been a major loss of confidence in Indonesia's immediate prospects of economic recovery.
The crisis revealed long-standing impediments to growth, which have, over time,
contributed to unduly high costs for the economy as a whole. These impediments include the
many trade distortions that have survived the wave of liberalization in the 1980's and
1990's. In response, the authorities undertook to accelerate the pace of reforms, to
engage in a major review of anti-competitive practices (including monopolies, oligopolies
and cartels) and to restructure the banking system.
The WTO's report states that Indonesia
ought to accelerate these reforms if it wants to restore past gains achieved by trade
While Indonesia's investment regime is
now open, the WTO report notes that the increasing use of tax incentives for investment is
worrisome as it tends to encourage over-investment in non-competitive sectors, increases
tax revenues foregone at a difficult time for the budget, and contributes to regional tax
competition. According to the report, Indonesia's continued pursuit of policies aimed at
achieving a more stable and transparent business environment, including the modernization
and enforcement of laws, would constitute a more effective way of attracting foreign
Since 1994 Indonesia has significantly
reduced its applied tariffs, with the lowering of rates going well beyond Indonesia's WTO
commitments. Applied MFN tariffs have been reduced from an unweighted average of about 20%
in 1994 to 9.5% in 1998. In 1998, tariffs on food items were reduced to a maximum of 5%.
Nevertheless, high tariffs continue to protect beverages, motor vehicles and textiles and
clothing. Indonesia committed itself to reduce the maximum applied tariff for all products
to 10% by 2003. Besides tariffs, Indonesia has undertaken to remove all non-tariff
barriers and export restrictions, that, until the financial crisis, continued to affect a
large share of the economy (10% of imports, 40% of exports, 30% of production). In the
sectors concerned, these measures were often combined with other forms of assistance,
including restrictions on domestic trade, price fixing and subsidies, all of which aimed
at providing protection to local producers on various grounds (including infant industry
protection, management of natural resources or simply favouritism). Accordingly,
restrictive licensing requirements and local content programmes are gradually being phased
out. Quantitative restrictions on exports are being converted into taxes, whose rates are
to be reduced to a maximum of 10% by year 2000.
Since the beginning of the crisis,
Indonesia has also deregulated trade in the main agricultural commodities (except rice,
for social reasons), terminated production and trade monopolies in certain intermediate
industries (cement, plywood, rattan) and reduced export taxes on wood. However, with the
devaluation of the Rupiah increasing the cost of imported food, it has been important that
deregulation not trigger further price increases. The report notes that large subsidies
are still necessary to stabilize domestic prices of essential foodstuff.
Overall, the authorities can be praised
for having, in such difficult circumstances, resisted potential protectionist pressures,
including the temptation to use the leeway to raise tariffs allowed by the growing gap
between bound and applied MFN rates (about 25% at present).
Nevertheless, the restoration of
confidence in the Indonesian economy will also entail the establishment of more
rules-based, competition-oriented internal policies. In the past, the position of large
conglomerates and all kinds of cartels and marketing arrangements have been facilitated by
the absence of clear competition rules and a certain tolerance of anti-competitive
practices. Conglomerates have been the main beneficiaries of Government support, namely
the tax incentives, subsidized lending, production licenses, and trade privileges. While
these conglomerates contributed to Indonesia's expansion in the past, the outcome was a
concentration of production and of private debts in the hand of a few business groups.
While the Government has terminated several monopolies since the onset of the crisis,
further progress could be achieved in strengthening the competition framework, introducing
greater transparency in the attribution of Government loans and subsidies, and effectively
enforcing existing laws and regulations in the area of Government procurement.
Prior to the crisis, Indonesia's
selective approach to trade and investment liberalization created "winners",
namely the beneficiaries of continued protection or assistance, and "losers",
that is the firms, who either did not benefit from privileges or were adversely affected
by them. Since the crisis, there has been a growing realization that such distortions
constitute major impediments to Indonesia's competitiveness.
The trade and investment policies
followed by the Government in the past two decades have generally been beneficial to the
manufacturing sector. Average MFN tariffs are low (well under 10%), except for chemicals
and motor vehicles, and all industries are open to FDI. However, some parts of
manufacturing continued to be assisted by high and escalating tariffs (automobile,
textiles and clothing), restrictive licensing (petro-chemicals), restrictive marketing
arrangements (cement, paper) and export taxes (wood products). These measures, which are
legacies of old import-substitution policies, threaten the competitiveness of the
industries concerned. The Government is committed to removing most of them under the
present reform programme.
Indonesia is gradually abandoning its
traditional reliance on Government control and public monopolies in services.
Infrastructural services (telecommunications, water supply, electricity) have been largely
opened to FDI, financial services have been deregulated, and significant commitments were
made in the GATS. Since the beginning of the crisis, Indonesia removed remaining
restrictions on FDI in services and, as part of its efforts to restructure its financial
sector, further relaxed ownership limits in banking. The Government is considering a
further opening up of the telecommunications services.
The report notes that current reforms
should therefore be seen as a continuation, or, indeed, an acceleration, of the kinds of
trade and investment policies that have greatly contributed to Indonesia's economic
development and integration in the world economy over the past decade. Full implementation
of these reforms, together with Indonesia's WTO commitments, could help Indonesia to
stabilize its economy by 1999 and return to economic growth by 2000. The WTO's report
concludes that the success of these reforms in fostering Indonesia's eventual economic
recovery depends crucially on a pick-up in exports, which itself relies heavily on the
maintenance of a stable, predictable and open international trading system. For their part
therefore, WTO Members, many of whom already provide substantial financial and technical
assistance to Indonesia, can lend further support to Indonesia's unilateral economic and
trade reforms by resisting domestic protectionist pressures.
Notes to Editors
The WTO's Secretariat report,
together with a policy statement prepared by the Indonesian Government, will be discussed
by the WTO Trade Policy Review Body (TPRB) on 3 and 4 December 1998. The WTO's TPRB
conducts a collective evaluation of the full range of trade policies and practices of each
WTO member at regular intervals and monitors significant trends and developments which may
have an impact on the global trading system. The Secretariat report covers the development
of all aspects of each of Indonesia's trade policies, including domestic laws and
regulations, the institutional framework, trade policies by measure and by sector. Since
the WTO came into force, the new "areas" of services and trade-related aspects
of intellectual property rights are also covered.
To this press release are attached the
summary observations from the Secretariat report and a summary of the government policy
statement. The full Secretariat and government reports are available for journalists from
the WTO Secretariat on request (call 41 22 739 5019). They are also available for the
press in the newsroom of the WTO internet site (www.wto.org). The Secretariat report,
together with the government policy statement, a report of the TPRB's discussion and the
Chairman's summing up, will be published in hardback in due course and will be available
from the WTO Secretariat, Centre William Rappard, 154 rue de Lausanne, 1211 Geneva 21.
Since December 1989, the following
reports have been completed: Argentina (1992), Australia (1989, 1994 & 1998), Austria (1992), Bangladesh
(1992), Benin (1997), Bolivia (1993), Botswana (1998), Brazil (1992 & 1996), Burkina
Faso (1998), Cameroon (1995), Canada (1990, 1992, 1994 & 1996), Chile (1991 &
1997), Colombia (1990 & 1996), Costa Rica (1995), C˘te d'Ivoire (1995), Cyprus
(1997), the Czech Republic (1996), the Dominican Republic (1996), Egypt (1992), El
Salvador (1996), the European Communities (1991, 1993, 1995 & 1997), Fiji (1997),
Finland (1992), Ghana (1992), Hong Kong (1990 & 1994), Hungary (1991 & 1998),
Iceland (1994), India (1993 & 1998), Indonesia (1991 and 1994), Israel (1994), Jamaica
(1998), Japan (1990, 1992, 1995 & 1998), Kenya (1993), Korea, Rep. of (1992 &
1996), Lesotho (1998), Macau (1994), Malaysia (1993 & 1997), Mali (1998), Mauritius
(1995), Mexico (1993 & 1997), Morocco (1989 & 1996), New Zealand (1990 &
1996), Namibia (1998), Nigeria (1991 & 1998), Norway (1991 & 1996), Pakistan
(1995), Paraguay (1997), Peru (1994), the Philippines (1993), Poland (1993), Romania
(1992), Senegal (1994), Singapore (1992 & 1996), Slovak Republic (1995), the Solomon
Islands (1998), South Africa (1993 & 1998), Sri Lanka (1995), Swaziland (1998), Sweden
(1990 & 1994), Switzerland (1991 & 1996), Thailand (1991 & 1995), Trinidad and
Tobago (1998), Tunisia (1994), Turkey (1994 & 1998), the United States (1989, 1992,
1994 & 1996), Uganda (1995), Uruguay (1992 & 1998), Venezuela (1996), Zambia
(1996) and Zimbabwe (1994).
Secretariats report: summary Back to top
TRADE POLICY REVIEW BODY: INDONESIA
Report by the Secretariat Summary Observations
The period under review (1994-98) has
been one of great contrast for Indonesia. After three decades of continuous growth
fostered by political, social and macro-economic stability, the Asian economic crisis of
1997 has sown the seeds of major change in Indonesia's economy and political system. The
crisis, and the subsequent fall in GDP, the largest among ASEAN countries, revealed
underlying weaknesses in Indonesia's economic and financial structures, which prompted
calls for reform. Subsequently, Indonesia embraced a programme of measures aimed at
stabilizing the economy, restructuring its ailing banking system, and creating the
conditions conducive to a more efficient, market-based allocation of resources in several
Trade and foreign direct investment
have been at the heart of Indonesia's economic policy during the review period. In
1994-96, the pace of trade and investment reforms had slowed somewhat, compared with
previous years, with liberalization proceeding in a selective manner. In the face of the
recent economic crisis, however, the Government undertook to accelerate the pace of
reforms and to remove many remaining restrictions on domestic and international trade.
These reforms involve, inter alia, a major review of anti-competitive practices, including
monopolies, oligopolies and all other restrictive marketing arrangements that had survived
Indonesia's trade liberalization in the last decade. This will contribute to a
"levelling of the playing field" across many sectors, creating a more open,
competitive marketplace, where few firms will remain protected.
In the period under review, the
Indonesian economy went from high growth to deep recession. From 1994 to 1996, real GDP
grew on average by 8% annually. Although economic activity started to decelerate in the
second half of 1996, the financial crisis of 1997 transformed a soft landing of the
Indonesian economy into a serious recession. In the first half of 1998, GDP shrank by 12%,
and is expected to fall by 10-15% for the year as a whole. In addition, inflation has
climbed from an average of 10% in the years of high growth to an expected rate of 80-100%
at the end of 1998, with the sharp devaluation of the rupiah playing a role, particularly
through higher prices of imported food. These have also raised the cost of food subsidies
and have contributed to the budget moving from a small surplus in the 1996/97 fiscal year
to a projected deficit of 8.5% of GDP in 1998/99.
Indonesia's international trade has
also been severely affected by the recession in the country and elsewhere in Asia.
Imports, which increased by nearly 27% in 1995, declined by 3% in U.S. dollar value in
1997 before falling by 30% in the first quarter of 1998, under the combined effects of the
drop in domestic demand, the devaluation of the rupiah and a decline in trade finance.
Exports, a major element that could have stimulated activity in current circumstances,
have fallen (in value terms) as a result of the slump in demand elsewhere in Asia and the
marked decline in domestic production, generated in part by the lack of imported inputs,
with the trade finance factor and a serious shortage of containers also playing their
The causes of the financial and
currency turmoil are multiple and complex. External factors, such as the withdrawal of
international investors from Asia in the wake of the Thai, Philippines and Korean crises,
were compounded by internal developments, particularly growing uncertainty about economic,
social and political stability in Indonesia. The outcome was a major loss of confidence in
Indonesia's immediate prospects. Macroeconomic imbalances have not been the source of
market concern in the case of Indonesia. Instead, a late change of perception about the
soundness of the financial system led to a dramatic reassessment of the economic risk,
and, as economic conditions deteriorated, a re-evaluation of the political and social
risks. The reversal of market sentiment corresponded to the excessive optimism prevailing
before the crisis, which led investors, and possibly the international community, to
underestimate the risks associated with economic activities in Indonesia. The significant
devaluation of the rupiah, while improving export competitiveness helped slow imports, and
may have contributed to a rapid transmission of the crisis to the real economy. As a
consequence of these factors, Indonesia is into its worst recession since 1963.
In response, the authorities decided on
the need for reform to restore confidence and set the conditions for stable sustainable
growth. They have reiterated Indonesia's commitment to stable macroeconomic policies,
started to restructure the banking sector and addressed long-standing structural
impediments to growth, many of which had been identified in the course of previous Trade
Policy Reviews. These impediments include the many trade distorting barriers that survived
the wave of liberalization in the 1980s and 1990s, and which have, over time, contributed
to unduly high costs for the economy as a whole. The issue of Indonesia's competitiveness
had in fact already become a concern in 1996, when growth in exports, a main economic
strength, started to decelerate.
As reforms will inevitably take time,
the recovery of the Indonesian economy is unlikely to be rapid. After the collapse of
activity in 1998, the most optimistic scenarios forecast a stabilization of the economy in
1999 and a recovery in 2000. Consequently, the living standards of Indonesians as a whole
cannot be expected to return to their pre-crisis levels before the early years of the next
century. Before the crisis is over, however, a substantial proportion of Indonesia's
population will have slipped back below the poverty line.
Whereas during the past three
decades, Indonesia's institutional and political structures were characterized by a high
degree of stability, the economic crisis that arose in the second half of 1997 created the
conditions of a major political transition, involving the preparation of free democratic
elections and the elaboration of a new constitution.
Until the recent financial crisis,
there were few changes in administrative responsibilities concerning economic policy,
apart from the merging in 1995 of the Ministry of Industry and the Ministry of Trade into
one single entity, the Ministry of Industry and Trade, which is now responsible for all
domestic and international trade matters. Since the crisis, however, important changes
have been introduced to implement the programme of economic reforms. The National Economic
and Financial Resilience Council, a body chaired by the President of the Republic, was
established to supervise implementation of the reform programme. Bank Indonesia was
granted autonomy over the formulation and the implementation of monetary policy. The
supervision of state-owned enterprises was transferred from line Ministries to a
newly-created Ministry for State-Owned Enterprises and a Privatization Board was
established. Finally, the Government created the Indonesian Bank Restructuring Agency
(IBRA), a financial body responsible for the restructuring of Indonesia's ailing banks.
Indonesia's legal system, particularly
the laws and regulations pertaining to business, has been modernized. Prior to the
financial crisis, Indonesia had already revised its Company Law and introduced new Customs
and Intellectual Property Rights laws in order to give full effect to obligations
undertaken in the context of WTO Agreements. Since the beginning of the crisis, the
process of legal reform has accelerated. A major review of the Bankruptcy Law, the Banking
Law, the Central Bank Law, the Company Law and liquidation regulations is underway. Other
priorities involve the establishment of a more effective Commercial Court System and the
introduction of clearer competition rules. Continued progress in these areas would make a
major contribution to restoring the international business community's confidence in
Following significant liberalization in
the period 1993-95, and, as a result of the reforms in 1998, Indonesia's investment regime
is now very open. Partly as a result, Indonesia has attracted unprecedented amounts of
foreign direct investment (FDI) since the 1994 Trade Policy Review. While reflecting a
legitimate desire to maintain its locational advantage, the increasing resort to tax
incentives for investment may be worrisome as it tends to encourage over-investment in
non-competitive sectors, increases forgone tax revenues at a difficult time for the
budget, and contributes to regional tax competition (with Indonesia not the only country
in the region using investment incentives). Instead, Indonesia's continued pursuit of
policies aimed at achieving a more stable and transparent business environment, including
the modernization and enforcement of laws, will arguably constitute a more effective way
of attracting foreign investors.
TRADE POLICY BY MEASURE
During the early part of the review
period (1994-96), when economic growth was high, Indonesia continued to deregulate in a
pragmatic and gradual manner. This approach nevertheless allowed the process to be highly
selective and excluded some major sectors from reforms. Since the onset of the financial
crisis, however, Indonesia has decided to extend reforms to even the most protected areas
of its economy. With full implementation, these reforms will make the present period under
review a watershed in the process of liberalization.
One of the most notable
achievements during the review period was the significant reduction of applied tariffs,
with the lowering of rates going well beyond Indonesia's WTO commitments. Applied MFN
tariffs have been reduced from an unweighted average of about 20% in 1994 to 9.5% in 1998.
Further unilateral tariff cuts are scheduled up to 2003 in accordance with a clearly
defined programme of tariff reduction. By 2003, the maximum applied tariff for nearly all
products will not exceed 10%. Already in 1998, tariffs on food items have been reduced to
a maximum of 5%. Nevertheless, high tariffs continue to protect a few products such as
alcoholic beverages, motor vehicles, certain basic chemicals, and, to a lesser extent,
leather and textiles products. While the erosion of tariff peaks and gradual reduction of
all rates will alleviate the distortions embodied in the tariff schedule, notably the
level of escalation, the process is still incomplete. Producers of final goods in the
manufacturing sector generally, and in the textiles and clothing and wood industries, in
particular, continue to benefit from substantial tariff escalation.
Until the financial crisis, limited
progress had been made in removing the array of non-tariff barriers (NTBs), such as import
monopolies and restrictive licensing, as well as export controls, which continued to
affect up to 10% of imports, 40% of non-oil exports and 30% of production. In the sectors
concerned, NTBs and export measures were often combined with other forms of assistance,
including restrictions on domestic trade, price fixing and subsidies, all of which were
aimed at providing implicit or explicit protection on various grounds (including infant
industry protection, security of food supply, management of natural resources or
favouritism). As a result, the list of products benefiting from some form of protection or
assistance was still extensive when the crisis broke late in 1997, covering most strategic
food commodities, mining and wood resources, key intermediate industrial goods
(fertilizers, cement, iron and steel) and transport equipment.
The removal of trade restrictions is at
the centre of Indonesia's current reform process. Besides the tariff reduction programme,
Indonesia has undertaken to remove all non-tariff barriers and export restrictions not
justified on health, safety or environmental grounds by the end of the century.
Accordingly, the number of tariff lines covered by import licensing requirements has
fallen substantially (by half, overall, since the last Trade Policy Review, taking into
account the fulfilment of WTO commitments). Furthermore, local content programmes are
gradually being phased out. Restrictions on exports are also being removed.
More specifically, Indonesia
deregulated trade in the main agricultural commodities (except rice and soybeans, for
social reasons), terminated production and trade monopolies in certain intermediate
industries (cement, plywood, rattan), and reduced export taxes on key commodities (wood).
Further deregulation of trade, particularly additional cuts in tariffs and export taxes,
is scheduled over the next two years. It is also noteworthy in this time of crisis that
Indonesia has resisted protectionist pressures, including the temptation to use the leeway
to raise tariffs allowed by the growing gap between bound and applied rates.
The restoration of confidence in
the Indonesian economy will also entail the establishment of more rules-based, transparent
and competition-oriented internal policies. In the past, internal policies contributed to
the consolidation of the position of large public and private conglomerates, which
continued their expansion in the absence of clear competition rules and a certain
tolerance of restrictive marketing arrangements and cartels. In addition, these
conglomerates benefited from tax incentives, tax exemptions, subsidized lending,
production licenses and other formal and informal Government support. During the review
period, conglomerates continued to dominate key sectors such as agri-food, steel, basic
chemicals, pharmaceuticals, forestry and wood products, paper and communications. They
often received these internal (as well as external) privileges in return for their
implementation of the Government's industrialization objectives.
The authorities have moved to address a
number of shortcomings in Indonesia's competition and regulatory framework pertaining to
business and in its protection of intellectual property rights. Since the crisis, the
Government has terminated numerous production and distribution monopolies in the cement,
plywood, paper, cloves and other sectors. Indonesia also intends to introduce a
consolidated competition framework by the end of 1998 and is committed to enhanced
transparency both in the granting of subsidies and loans for Government-sponsored projects
and for the upcoming round of privatization. The economy might also benefit from more
streamlined, efficient and effectively enforced government procurement practices.
TRADE POLICIES BY SECTOR
Prior to the crisis, trade and
investment liberalization had affected some sectors more than others. The provision of
assistance or protection for selected sectors produced "winners", namely the net
beneficiaries, and "losers", that is the firms who either did not benefit from
privileges and protective measures, or were adversely affected by them. Since the crisis,
however, there has been a growing realization that such distortions to competition
constitute a major impediment to improving the competitiveness of the Indonesian economy.
Consequently, since late 1997, Indonesia has to a large extent deregulated trade and
distribution in agriculture, eliminated certain protection and trade privileges in
manufacturing, and prepared further steps to liberalize telecommunications and financial
services. Together, these measures are integral to Indonesia's economic recovery.
While liberalization in agriculture
as well as in forestry lagged behind that of the rest of the economy until 1997, domestic
and international trade was largely deregulated in late 1997 and early 1998. Imports have
been the most affected, with a large reduction in tariffs and the removal of BULOG's
monopoly rights concerning all commodities under its control (except rice, for social
reasons). Obstacles to domestic trade are also being removed and export controls
Although the long term benefits of
these reforms are evident, there are difficulties in liberalizing agriculture under the
present difficult economic and social conditions. With the devaluation of the rupiah
increasing the cost of imported food, it has been socially important that deregulation not
trigger further price increases. Large subsidies are currently necessary to stabilize
domestic prices of essential food items (including rice and cooking oil). In addition,
with the devaluation of the rupiah, a number of agricultural items, in which Indonesia is
self-sufficient, such as palm oil, became very competitive in the world market. It was
thought that this could lead to domestic shortages, if exports materialized, and add to
inflationary pressure. To deal with these difficulties, the Government introduced
temporary export bans on rice, wheat, wheat flour and other basic commodities; these bans
were converted into export taxes in September 1998.
The trade and investment policies
followed by the Government during the past two decades have been extremely beneficial to
the manufacturing sector. These policies have been continued during the period under
review. Applied MFN tariffs in manufacturing have been lowered to a simple average of 9.7%
in 1998. The average collected duty is even lower, given that a high proportion of
production and trade takes place in duty-free zones. The opening up of nearly all
industries to FDI between 1993 and 1995 helped attract large amounts of FDI.
Despite liberalization, some parts of
manufacturing continued to be assisted by high and escalating tariffs (automobiles,
textiles and garments), restrictive licensing (certain petro-chemicals), administratively
determined local-content requirements (transport equipment), restrictive marketing
arrangements (paper, cement) and export taxes (wood products). While these policies have
encouraged the shift of production towards higher value-added products, by driving prices
and costs above import-competing levels, they also threatened the long-term
competitiveness of the industries concerned. In the context of the present reform
programme, the Government is taking steps to remove trade restrictions affecting these
The expansion of services has gone
hand-in-hand with the overall development of the economy, which generated needs for
telecommunications, transport or financial services, and with a change in policy focus. In
areas such as telecommunications, aviation and financial services, Indonesia gradually
abandoned its reliance on government control and public monopolies. As a result,
infrastructural services (telecommunications, water supply, electricity) were largely
opened to FDI in 1994-95; financial services were deregulated in the late 1980s and early
1990s; and in the period under review, competition was introduced in certain segments of
the telecommunications and air transport market.
Reflecting the domestic reform process
and external deregulation, foreign access to the Indonesian services market has increased.
In the Uruguay Round, Indonesia made specific commitments in several services areas in the
GATS, and it added to these in the recent WTO negotiations on telecommunications (1996)
and financial services (1997), thereby contributing to their successful conclusion.
Services are already largely open to FDI. In 1994 basic infrastructure was opened to
foreign investors, provided a 5% minimum of Indonesian equity was maintained. This
encouraged foreign firms to invest in telecommunications and power generation, where they
have become major operators. In 1998, the (main) remaining restriction on FDI in services,
i.e. that on domestic (wholesale and retail) trade, was removed. As part of its efforts to
restructure the financial sector, the Government is currently considering relaxing the
remaining limits on foreign ownership in banking.
TRADE POLICIES AND FOREIGN TRADING
The broad direction and objectives
of Indonesia's trade and investment policies have not changed during the review period,
but have been given renewed impetus by the present crisis. Prior to 1997, trade and
investment liberalization already proceeded to a large extent on a unilateral basis, with
the benefits of such liberalization being extended on an MFN basis. Current reforms are
also to be implemented on an MFN basis. In several cases, they complement (financial
services) or anticipate (the elimination of certain local-content requirements) the
implementation of existing WTO commitments.
Indonesia's commitment to
multilateralism has recently again been confirmed; in particular, this has been shown by
its timely (and in some cases advanced) implementation of its Uruguay Round obligations
and additional commitments in recent WTO negotiations covering information technology,
telecommunications and financial services. In its relations with ASEAN partners, Indonesia
adheres to the principle of open regionalism, an approach that it also promotes in the
APEC forum. Tariff reductions under the AFTA-CEPT scheme of ASEAN have been kept largely
in line with unilateral MFN tariff cuts, so that the margin of preference has remained
small (around 2%).
Current reforms should therefore be
seen as a continuation, or, indeed, an acceleration, of the kinds of trade and investment
policies that have greatly contributed to Indonesia's economic development and integration
in the world economy over the past decade. Fully implementation of these reforms, together
with Indonesia's WTO commitments, would result in Indonesia having one of the most open
economies among developing countries by the turn of the century.
For their part, WTO Members, many of
whom already provide substantial financial and technical assistance to Indonesia, can lend
further support to its unilateral economic and trade reforms by resisting domestic
protectionist pressures. The success of these reforms in fostering Indonesia's eventual
economic recovery depends crucially on a pick-up in exports, which itself relies heavily
on the maintenance of a stable, predictable and open international trading system.
report Back to top
TRADE POLICY REVIEW BODY: INDONESIA
Report by the Government
economic performance at a glance
Since the late sixties, Indonesia
has made steady progress with its economic development. This progress can be easily
observed by through Indonesias annual GDP growth rate, which averaged 7%, for each
of the past twenty-five years. Other indications of progress include an increased per
capita income and low inflation rate. In 1996, per-capita income surpassed US$ 1,000. For
the last ten years Indonesias inflation rate was moderate, averaging less than 10%
In the early years of development,
Indonesia was still heavily dependent on the export of oil and gas. However, since the
late 1980s, the manufacturing sector has replaced oil and gas as the main source of
export revenue. With the increasingly diversified economy, coupled with a skilled work
force and a strong commitment to free-market economy, Indonesia offers the international
business community enormous opportunities for trade and investment.
Since 1994, Indonesia has made
significant improvements to its investment climate. Procedures for obtaining investment
approval have been simplified. Foreign investment companies are allowed to fully own their
businesses. Another policy was introduced in 1995 when the Indonesian government announced
the schedule of tariff reductions through the year 2003. The schedule is an acceleration
of the Indonesian commitment under the WTO and contains substantial reduction of tariffs
on raw materials and intermediate products needed by various industries.
The Indonesian economy continually
enjoyed strong growth during the year of 1996, and first half of 1997. However, since
mid-1996, Indonesia was affected by the EL-NINO phenomenon, causing severe drought in many
food production centers, mass harvest failure and heavy smoke in Sumatra and Kalimantan
The Indonesian economy was interrupted
by currency turmoil in July 1997 which spilled over into monetary and economic crisis.
This crisis has brought serious problem to Indonesian domestic and foreign trade.
Structural adjustment in all sectors is
needed for Indonesia to overcome the current economic crisis through the assistance of
international institutions such as the IMF, World Bank, and ADB as well as bilateral
assistance. The Government has signed letters of intent with the IMF on the implementation
of reformation and stabilization programs; examples include the removal of structural
rigidities, improvement of fiscal transparency, and restructuring of the banking system.
Due to budget limitations, the
government has set up a new revised budget for the fiscal year of 1998/1999. The revised
budget is based on the following assumptions: 12% GDP decline, Rp. 10,600 per US dollar
exchange rate, USD $13/barrel revenue from oil exports, and a 66% inflation rate.
Privatization program on state-owned
companies has been going on under the new State Ministry of State-Owned Enterprises. The
supervision of all state-owned enterprises was transferred from line Ministers to the
State Minister for State Owned Enterprises by the Government Regulation 50/1998 and
Presidential Instruction 15/1998. This move is seen by the Government as the first step in
rationalizing the management of State-Owned Enterprises, leading to their eventual
privatization. A Privatization Board, responsible for the management and privatization of
State-Owned assets, was established after the first Letter of Intent with IMF.
In the process of restructuring of the
banking system, 16 insolvent banks had their licenses revoked.
To boost the confidence in the banking
system, the Government established the Indonesian Bank Restructuring Agency (IBRA) on 27
January 1998. In April 1998, IBRA announced liquidity criterion to determine whether a
bank should be placed under supervision, taken over, closed or have its assets frozen. To
date, 26 banks have been closed or had assets frozen, 4 private banks have been taken
over, and 48 state and private banks are currently being closely supervised.
In accordance with legislation passed
by the Development Reformation Cabinet, the Central Bank of Indonesia is in the process of
becoming an independent agency.
The Indonesian economy relies on
manufacturing, trade, tourism, agriculture, and the exploration of mineral resources.
Manufacturing sector always dominates; for example, it accounted for 25.6% of
Indonesias GDP in 1997. The main products of the consumer goods were textiles,
processed foods, motor vehicles, and electronics equipment. The main intermediate goods
included plywood, cement, fertilizer, metals and glass products. The second largest
economic sector in 1997 was trade and tourism, accounting for 16.9% of GDP. Also during
1997, the agriculture sector, covering forestry and fishing, accounted for 14.8% of GDP.
The main agriculture products for export are rubber, coffee, palm oil, cocoa, fish and
The Indonesian economy has dramatically
slowed down due to the current monetary and economic crisis. To reverse this situation,
the following need to be addressed:
(i) Increasing domestic demand;
(ii) lowering inflation;
(iii) increasing non-oil/gas exports;
(iv) political reformation.
To reverse the economic downturn, the
Government of Indonesia continues to pursue prudent monetary and fiscal policies and also
take action to strengthen the financial system. The government is committed to rapid
economic stabilization as well as ensuring adequate supplies of food and basic necessities
to all areas of the country.
KEY DEVELOPMENTS IN TRADE
AND ECONOMIC POLICY SINCE THE LASt REVIEW
Since the last review in 1994, the
Indonesian Government has taken several measures to satisfy international commitments and
improve the international competitiveness of the Indonesian economy. These measures
clearly demonstrate that the Government of Indonesia is consistently implementing its
commitments under the WTO, ASEAN and APEC.
May 1995 Deregulation Package
In May 1995, the Government of
Indonesia announced a series of deregulation measures as part of its efforts to improve
efficiency and endurance of the national economy, and to increase the competitiveness of
Indonesian products in the international market. This deregulation package includes, among
other items, the following provisions:
(v) Gradual reductions in the rate of
import tariffs. All import tariffs that are currently over 20% will be reduced to a
maximum rate of 20% by 1998 and a maximum rate of 10% by 2003. Import duties that are
currently 20% or lower will be reduced to a maximum of 5% in the year 2000;
(vi) numerous import duties will be
immediately reduced to a rate between 5% and 20%;
(vii) many current import surcharges
will be eliminated or reduced;
(viii) a number of products previously
protected by non-tariff barriers and which could only be imported by registered importers
or importer producers, will be opened to general importers;
(ix) capital goods with a minimum value
of 30% of the companies original investment which are imported by companies undergoing
business restructuring will be exempted from import duties;
(x) some business sectors previously
closed to new investment have been opened. These sectors include, among others, cooking
oil from palms, finished/semi-finished rattan products, manufacture of industrial boilers,
motor vehicle industry, aircraft maintenance, and domestic trade support services;
(xi) some business sectors are closed
to new investment. These include mangrove wood processing, cyclamate and saccharine
industries, manufacture of pulp using sulfite, manufacture of chlor alkali using mercury,
and chlorofluoro carbon (CFC/Freon) industry;
(xii) licensing procedures for industry
have been simplified. Industries in the Industrial Zone and Bonded Zone will be directly
provided with an industrial license (IUI-Izin Usaha Industri) without being required to
first obtain a Letter of Principle Approval. In order to expand, a company needs only
submit its plan for expansion. A registration receipt, which acts as an industrial
business permit, will be given to small-group industries; and
(xiii) a number of business sectors
remain reserved for small business or small businesses in cooperation with medium or large
businesses. Such sectors include, for example, poultry breeding, traditional hats, and
1996 Deregulation Measures
In January and June 1996 the
Government of Indonesia announced a set of economic deregulation measures which include:
(xiv) Continuation of the Scheduling
of Tariff Reductions. In the May 1995 Deregulation Package, the Government announced
the phase reduction of tariffs. One group of tariff lines is to be reduced in steps, so by
the year 2000 they will not exceed 5%. Another group of tariff lines is to be reduced so,
by the year 2003, they will not exceed 10%. The government is now announcing the schedule
of tariff reductions (see attached table) to be implemented in coming years so the
business community can best plan investment and production.
(xv) Reduction in Tariffs on
Imported Capital Goods. A number of steps have been taken to reduce the tariffs on
imported capital goods.
(xvi) Elimination of Tariff
Surcharges. In accordance with the Customs Law, the surcharges on imported goods will
be eliminated. In doing so, Indonesia accelerates the implementation of the WTO
(xvii) Simplifications of Non-Tariff
Barriers. To expedite the procurement of capital goods and raw materials and to
improve the efficiency of industry, several non-tariff barriers have been eliminated.
These steps also reflect the acceleration of Indonesias commitment under the WTO to
reduce the number of non-tariff barriers.
(xviii) Regulation on Anti-Dumping.
To counter dumping practices by foreign exporters, the Anti-Dumping Regulation has been
introduced. This measure is consistent with the WTO Agreement on Anti-Dumping.
(xix) Facilitation of Exports.
Simplification of requirement and procedures to obtain the Certificate of Origin,
elimination of inspection of export goods by Surveyor, and elimination of the PEB document
for exports with a value of Rp 100 million or less, are measures adopted to facilitate
(xx) Simplification of Licenses for
Industry within Industrial Estates. To increase export activities, the Government
simplified license requirement for industries within the Industrial Estates.
(xxi) Operation of Bonded
Areas/Bonded Warehouses. The operation of Bonded Areas and Bonded Warehouses, which
could previously be done by state enterprises, is now opened to the private sector.
(xxii) Relaxation of Restrictions on
Export and Import Activities by Foreign Investment Manufacturing Companies. Some
latitude is given to foreign investment manufacturing companies for import and sale of
their own products up the wholesale level.
(xxiii) Simplification of Procedures
for the Import of Waste as an Industrial Raw Material. Procedures for the importation
of waste as industrial raw material will be improved and adjusted under Customs Law.
1997 Deregulation Packages
On 7 July 1997 the Government
announced the economic policy deregulation as a continuation of the preceding series of
deregulation packages. The economic policy reform in this deregulation package included:
reduction of import tariff, private auction house, non-direct investment company, transfer
of capital goods, export without notification, regional taxes and redistribution and non
tax revenues in the industry and trade sectors. The purpose of this package was to
decrease bureaucracy and increase exports.
Starting from 17 September 1997 the
Government reduced the import duty on raw and auxiliary materials for certain products
covering 153 tariff items. This reduction was implemented to stimulate export oriented
industries and to increase the sustainable national economy.
The range of the reduction of import
duties is between 5 to 10 percentage points, and the final tariff will become zero, 5, 10
and 15 percent. The reduced duties apply to raw materials for: textiles (40 tariff items),
wood processing (67 tariff items), basic chemical products (31 tariff items) and leather
products (9 tariff items).
The raw and auxiliary materials for
steel, machinery and automotive and agriculture products, are respectively 3 tariff items
Indonesian Economic Experience in
Over the past three decades,
Indonesia has reaped maximum benefits from structural changes that were created to achieve
a more integrated global economy. The maintenance of macroeconomic stability through the
pursuit of prudent fiscal and monetary policy, financial sector reform, and greater
openness of the economy have been the keys to this success. During this period, the
economy grew at an average of almost 7% a year, inflation was contained at a single digit
level and the economy became more diversified, with the private sector having a greater
role in the economy.
The second half of 1997 marked the
beginning of the Indonesian economic downturn as reflected in the slowdown in economic
activities, soaring prices, and weakening of financial institutions. The battered Rupiah
exchange rate coupled with high interest rates led to a slowdown in many economic sectors.
The economy is estimated to have grown
by only 4.65% in 1997, far below the performance of the previous year. The slowdown
accounted for the weakening domestic demand, mainly consumption and investment in both
private and public sectors. The weakening domestic demand was reflected in a much reduced
pace in expansion of the bank loan for investment and consumer spending. The inflation
rate rose significantly, reaching 11.05% in 1997, fuelled by the depressed Rupiah exchange
rate, and the long drought associated with the change in the global climate that adversely
affected agricultural output.
Indonesian Economic Policy in 1998
Recognizing the problems
confronting the country, the government of Indonesia has introduced various programs and
adjustment measures. As a member of the IMF, World Bank, and ADB, Indonesia frequently
consults these institutions and invites them to provide advice about how to improve the
economy. On 15 January 1998, the Government adopted the Program of Economic and Financial
Reform and Restructuring. This program was formulated to cover actions in several areas
including: efforts to restore financial sectors, fiscal consolidation, monetary issues,
the exchange rate, and structural adjustments in the form of broadening and deepening the
deregulation program. To complement and modify the Memorandums of 15 January 1998, the
Government of Indonesia signed two Supplementary Memorandums on 8 April 1998 and 24 June
Considering its broad scope and its
coverage of a number of economic aspects, the program will be implemented over the
three-year period. Its implementation will be closely monitored and reviewed. To that end,
Indonesia will be assisted by experts from the IMF, World Bank, and ADB.
The fundamental objective of the
structural adjustment program is to increase national efficiency and competitiveness of
the Indonesian economy. To accomplish this objective, the steps to be implemented include:
(xxiv) On 21 January 1998, special tax
and customs benefits previously granted to the National Car Program were discontinued.
(xxv) A gradual reduction of import
tariffs, including those on chemical products and iron/steel, to 10 percent in the year
2003. Starting on 1 January 1998, import tariffs on a large number of chemical products
were reduced from 10 20 percent to 5 percent. Most tariffs on iron/steel will also
be reduced starting January 1999.
(xxvi) Starting 1 January 1998, various
commodities, such as wheat, wheat flour, soybean and garlic, can be imported freely under
General Importer status. Currently, soybean and garlic imports are subject to a 20 percent
tariff and wheat and wheat flour imports are subject to a 10 percent tariff. They are to
be reduced to 5 percent in the year 2003, and the administered retail price of cement has
also been abolished.
(xxvii) A reduction of obstacles
hindering exports, including export taxes, is to be implemented in stages.
The main structural elements of
Memorandum of Economic and Financial Policies include further deregulation, trade
liberalization, privatization of state enterprises, improvements in the banking system and
While medium-term outlook remains
uncertain given the severity of the crisis, the objective of the Government of Indonesia
is to restore sustainable economic growth with low inflation as quickly as possible.
The Government of Indonesia attaches
the highest priority to ensuring that food and other essential items are available at
affordable prices to the entire population. Food prices, particularly the price of rice
and cooking oil, have risen drastically since the beginning of May 1998, causing serious
social hardship. While most private trade is functioning well, the Government is taking a
number of actions to ensure that there are no remaining impediments to the efficient
movement of basic commodities throughout the country.
The program also envisages that
virtually all of the restrictions that have been in place over time will soon be removed.
(xxviii) From 1 February 1998, BULOG
monopoly is limited solely to rice;
(xxix) the Clove Marketing Board is
eliminated by June 1998;
(xxx) all restrictive marketing
arrangements are abolished by 1 February 1998, specifically: cement, paper, and plywood;
(xxxi) all formal and informal palm oil
plantation barriers are removed by 1 February 1998;
(xxxii) effective on 1 February 1998,
tariffs on all food items were cut to a maximum rate of 5 percent, while tariff rates on
non-food agricultural products were reduced by 5 percentage points; and
(xxxiii) on 29 May 1998, the Government
adopted a reformation policy on investment in which the list of Sector Closed for
Investment was revised.
Sectors Closed for Investment
(i) Primary Sectors
Cultivation and Processing of
Marijuana and the like
Exploitation of Sponges
Contractors of Forest logging
Hazardous Pesticides of Penta
Chlorophenol, Dichloro Diphenyl Tricholo Ethane (DDT), Dieldrin, Chlordane.
Production of pulp using Sulphite
processing and production of Pulp with whitening Chlor
Alkalin Chloride Industries using
Manufacturing of Choloro Fluoro Carbon
Manufacturing of Cymate and Saccharine
Processing of mangrove wood to produce
Firecrackers and fireworks
Explosive Materials and the like
Manufacturing of weapons and related
Printing of valuable papers
Commercial Paper of Bank Indonesia
Sectors Closed for Investment when a
part of the shares are owned by foreign citizens and/or foreign legal entities
Freshwater fish and fresh water
Forest Utilization Right
Private television broadcasting, Radio
broadcasting services, News Paper and Magazines
Operation of cinema
Spectrum Management of Radio Frequency
and Satellite Orbit.
Trade Services and its support
Services, except: Retailer (mall, supermarket, department store and shopping center),
Distributor/Wholesale, Restaurant, Quality Certification Services, Market Research
Services, and After Sales Services.
Medical Services: general clinics,
maternity Clinic, specialist clinic and dental clinics.
COMMITMENTS IN THE INTERNATIONAL FORA
implementation of multilateral initiatives
The ratification of Marrakesh Agreement
has been done by the government of Indonesia on 2 December 1994. The government supports
the role of WTO in strengthening the multilateral trading system and commits to the
implementation of the obligations and responsibilities arising from the Uruguay Round.
This was shown by Indonesian commitments in WTO which recently includes information
technology, telecommunication, and financial services.
Concerning the implementation of the UR
results, Indonesia abolished most of the non-tariff barriers it committed to in Schedule
XXI. Furthermore, the Government has also eliminated import surcharges since June 1996.
The remaining non-tariff barrier is in the oil sector.
As a member of the WTO, Indonesia has
implemented the WTO Valuation Agreement since 1 April 1997. Since that time, the
determination of customs value for the imported goods is based on the provisions of the
Agreement. Moreover, Indonesia created the following instruments in the form of law and
regulations, such as Custom Law No.10/1995; Ministerial Decree of Finance No.
690/KMK.05/1996; Circulated Letter of Customs Director General No.SE-11/BC/1997; Director
General of Customs Decree No.KEP-14/BC/1997 and No.KEP-21/BC/1997. In line with the
implementation of the Agreement, Indonesia also revised its import procedures to
accommodate the new customs valuation system. Thus, the imported goods are processed
through a green or red channel. The selection for the green or red is based on the risk
assessment conducted by intelligence unit.
Since 1994, Indonesia has undertaken a
concerted exercise to improve existing IPR protection and procedures according to
international standards and practices as prescribed by all international conventions and
intellectual property rights. Efforts are also underway to enact new laws and amend
existing ones in compliance with WTO/TRIPS Agreements. As of May 1997, Indonesia enacted
three new laws in the field of IPR, namely:
(xxxiv) Laws No.12 of 1997 regarding
The Amendment to Law no.6 of 1982 on Copyright, as amended by law No.7 of 1987;
(xxxv) Law No.13 of 1997 regarding The
Amendment to Law No.6 of 1989 on Paten; and.
(xxxvi) Law No.14 of 1997 regarding The
Amendment to Law No.19 of 1992 on Trademark.
Steps are being undertaken to fulfill
Indonesias WTO/TRIPS obligations by the year of 1999. Enactment of new laws, namely,
for the protection of plant varieties, performers right and lay-out designs of
integrated circuits as well as minor amendments to the existing patents and trademark laws
are at various stages of drafting.
Indonesia has put into effect the most
favored nations for all WTO members and has never changed the status since mid 1995. As
for information, the Ministerial decree of Finance signed on January 21, 1998 mentioned
reducing the tariff with MFN system for all nations.
Implementation of Regional Initiatives
Indonesia attaches strong
importance to regional cooperation and continues to participate actively in various
regional groupings, such as ASEAN and APEC.
As one of the Bogor Declaration
initiators on trade and investment liberalization on 2010 for industrialized economies and
2020 for developing economy APEC members, Indonesia has committed to continual
liberalization on trade and investment. Indonesia will continue to pursue tariff
reductions in line with its trade liberalization efforts and commitments in ASEAN and
Indonesias priority is focused on
efforts to enhance trade and economic cooperation within ASEAN in the field of trade and
services, intellectual property rights, transportation and communication, infrastructure
development and industrial cooperation.
To implement the ASEAN-AFTA
commitments, Indonesia has taken measures since 1994 to lower its tariffs, and renewed the
schedule of tariff reduction for AFTA by the year of 2003, which includes 7.212 tariff
lines. Those tariffs consist of Inclusion List (6.622), Temporary Exclusion List (541),
Sensitive List (4), and General Exception list (45).
The current economic crisis will not
change Indonesian commitment to implement CEPT-AFTA scheme by the year 2003.
DIRECTION OF INDONESIAN POLICIES
Over the years, the government has
consistently demonstrated its ability to maintain its commitment to economic development.
However, due to unprecedented economic turbulence since mid 1997, the governments
first priority, in short-term, is to stabilize economic and political situations. The most
urgent priorities for the government are improving the distribution system and ensuring
adequate supplies on basic need commodities.
The government of Indonesia is
committed to continue the reform program covering 5 main components:
(xxxvii) Maintaining macro economic
(xxxviii) reforming and strengthening
the banking system;
(xxxix) restructuring corporate debt;
(xl) pursuing structural reform to
improve governance and private sector efficiency; and
(xli) taking action to protect the poor
and sustain key human resource investments.
Indonesia will continue to uphold its
commitments to the international community. Back to top