INDONESIA TRADE DIRECTORY ON DISK 1993 TRADEWARE BOX 406 WHITE MARSH VA 23183 TITLE : INDONESIA - ECONOMIC AND TRADE POLICY - Key Economic Indicators (Billions of 1983 Rupiah (RP) Unless Otherwise Noted) 1989 1990 1991 (est) Income, Production and Employment Real GDP 107,321 114,921 122,391 Real GDP Growth (pct) 7.4 7.4 6.0 GDP by sector Agriculture 22,086 22,645 N/A Mining and energy 16,727 17,198 N/A Manufacturing 19,836 22,182 N/A Electricity, gas, water 616 720 N/A Construction 5,878 6,587 N/A Retail trade and hotels 17,230 18,772 N/A Transport and communications 5,667 6,207 N/A Banking 4,228 4,812 N/A Real estate 2,880 3,012 N/A Government 8,397 8,887 N/A Other services 3,716 3,909 N/A Real per capita income (Rp '000) 613 588 631 Labor force (mils) 73.6 75.9 78.2 Unemployment rate (pct) 3.10 3.26 2.8 Money and Prices Money supply (Ml) (pct) 1/ 39.8 18.4 6.1 Interest rates 2/ 12.4 14.5 17.7 National savings/GDP (pct) 21.4 21.4 22.0 Investment/GDP (pct) 23.5 24.6 25.0 Consumer price index 3/ 4/ 337 115 126 Change in CPI 4/ 6.0 9.5 9.5 Wholesale price index 5/ 162 178 185 Exchange rate (Rp/$) 6/ 1,770 1,843 1,950 Balance of Payments and Trade (US$ million) 1989 1990 1991 Exports FOB 22,974 26,807 14,300 9/ Oil and gas 8,914 11,931 6,000 9/ Non-oil/gas 14,060 14,876 8,300 9/ Imports FOB -16,310 -21,455 -12,200 9/ Oil and gas -2,406 -3,222 -1,700 9/ Non-oil/gas -13,904 -18,233 -10,500 9/ Services (net) -7,944 -8,592 -4,700 9/ Current account -1,280 -3,240 -2,500 Annual official debt service 6,845 6,645 7,196 Exports to U.S. FOB 3,497 3,365 3,400 Imports from U.S. CIF 2,218 2,520 1,990 U.S. direct investment 3,770 3,827 N/A Official reserves (end of period) 6,562 8,661 9,754 Total foreign assistance 8/ 4,297 4,156 4,750 of which U.S. 90 135 138 1/ Annual growth rate, except for 1991 which is first half of 1991 over first half of 1990. 2/ Interbank funds rates; 1991 rate is January to June average. 3/ End of period. For 1989, FY 1977/78 equals 100; starting 1990, FY 1988/89 equals 100; due to change in basis of calculating CPI, comparable data for earlier years are not available. Fiscal year is from April 1 to March 31. 4/ First nine months of 1991. 5/ 1983 equals 100; end of year except for 1991 which is end-June. 6/ Period average; for 1991, period is January to August. 7/ Whole year totals. 8/ Total is amount pledged at the annual Intergovernmental Group on Indonesia (IGGI) donors' meeting (does not include all special assistance and aid outside the IGGI context.) 9/ Jan-Jun 1991 total only. 1. General Policy Framework The principal objectives of the Indonesian government's economic policies are twofold: to reduce the country's reliance on the oil sector as a source of foreign exchange and government revenues, and to stimulate job creation by giving freer rein to the private sector. Since the early 1980s the government's strategy has been generally successful in enhancing the country's economic performance. Growth in real gross domestic product has exceeded five percent every year since 1986, and was above seven percent in both 1989 and 1990. Due to the government's success in promoting non-oil exports, the performance of the national economy is less closely tied to the price of oil: in FY 1981/82 oil and gas comprised more than 80 percent of export earnings and 70 percent of domestic revenues; in FY 1990/91 they contributed 43 percent of export earnings and 45 percent of domestic revenues. This progress has been achieved while holding inflation to single digit levels and maintaining a convertible currency for both current and capital account transactions. While underemployment remains a concern, job creation has generally kept pace with the rapidly expanding work force. The government's wide-ranging reforms, known as "deregulation," are aimed at reducing burdensome regulations and administrative controls. The reforms have covered sectors such as banking and capital markets, taxation, customs, foreign trade, investment, transport, and telecommunications. The deregulation program has boosted economic performance and given the private sector a more prominent role in the economy. New opportunities for sales in export and domestic markets have resulted in rapid expansion of the non-oil manufacturing sector, which since 1983 has grown at an average annual rate of over 12 percent. Private investment has also been robust. Foreign investment approvals in 1990 exceeded $8.7 billion; domestic investment approvals were over $30 billion. Private fixed investment as a percentage of total fixed investment increased from about 50 percent in the late 1970s to 61 percent in 1990, underlining the growing role of the private sector in the economy. Strong domestic demand, fueled by vigorous private and public investment, has strained limited infrastructure and pushed up inflation. Increased private sector borrowing from offshore to finance investment has heightened concern about Indonesia's ability to service the resulting higher levels of debt. In addition, the current account deficit in 1990 grew rapidly due to higher imports and slower growth in exports. In an effort to reduce inflation and curb the demand for imports, in mid-1990 the government responded by slowing monetary growth. In October 1991 it further decided to postpone several major projects financed with foreign commercial credits. In the longer term, creating jobs for the country's relatively young population will pose a continuing challenge for economic policymakers. While the population growth rate has been reduced to just under two percent, an estimated 2.3 million persons will enter the workforce each year. The government estimates that creating jobs for these new entrants will require annual GDP growth of five percent or better for the foreseeable future. Another challenge will be completing and consolidating deregulation reform. Entrenched interests and restrictive regulations in certain sectors continue to pose obstacles to increasing the flexibility and efficiency of the economy. The Government, however, remains fully committed to the process of deregulation, and more deregulation packages are in preparation. Fiscal policy: The Government is seeking to augment its limited funds available for development through efforts to increase tax collections; in each of the last three fiscal years, domestic revenues have increased by at least 30 percent. The Indonesian authorities are required in principle to maintain a balanced budget without borrowing from domestic sources; however, external debt payments and government salaries together account for about 70 percent of operating expenditures. Foreign donors therefore finance a major share of development expenditures through bilateral or multilateral aid programs. The current five-year economic plan assigns a large role to private sector investment as a source of financing for economic growth. Monetary policy: In the conduct of monetary policy, the Central Bank buys and sells financial paper. The Government has on occasion ordered state-owned enterprises to withdraw deposits from the banking system. It also provides subsidized credit to financial institutions lending in target sectors. In early 1990 the government announced its decision to phase out these credits and further restricted new credits to a few priority sectors; between January 1990 and September 1991, outstanding liquidity credits declined almost 20 percent, from Rp 16.2 trillion to Rp 13.5 trillion (approximately $6.9 billion). In 1988 reserve requirements were cut from 15 percent to 2 percent. Indonesia imposes no capital controls. 2. Exchange Rate Policies The government has maintained the convertibility of the rupiah since the 1960s. There are no foreign exchange controls. The government follows a managed float policy based on a basket of major trading currencies, including the U.S. dollar. Current policy is to maintain the competitiveness of the rupiah through a gradual depreciation against the dollar, at a rate of about five percent a year. The exchange rate on November 1, 1991 was 1,977 rupiah per U.S. dollar. 3. Structural Policies In general, the government does not intervene directly to set prices, but allows the market to determine price levels. To promote food security, the government enforces a system of floor and ceiling prices for certain food products, for example, rice. In some cases, business associations, with government support, establish prices for their products. In mid-1990 the government, in response to domestic shortages, prohibited the export of certain types of cement. In 1990, the government established a new domestic clove trading system; the purchasing body's clove buying is supported with Central Bank liquidity credits. Direct government subsidies are confined to certain goods such as fertilizers and petroleum products. The Government is committed to reducing subsidies for agricultural inputs. On January 1, 1989, pesticides subsidies were removed. The fertilizer subsidy has been reduced annually from 1989 through 1991. Individuals and businesses are subject to income taxes. The maximum rate is 35 percent of annual earnings in excess of Rp 50 million (about $25,000). On April 1, 1985, a value-added tax (VAT) was introduced. The level of tariff protection has been reduced. Companies can apply for an exemption from or a rebate of import; duties and VAT paid on inputs used to produce exports. A few products remain subject to export taxes. In October 1989 export taxes on sawn lumber were raised to prohibitive levels. In July 1988, Indonesia and the United States signed a double taxation agreement, which entered into force in December 1990. 4. Debt Management Policies Indonesia's medium and long term foreign debt, both official and private, totals about $65 billion. In 1991 Indonesia will pay approximately $4.7 billion in principal payments and $2.9 billion in interest payments on public sector debt, or about 26 percent of its projected total export earnings. The government is fully committed to meeting its debt service obligations and has no plans to seek a debt rescheduling. In response to the sharp increase in external debt occasioned by higher private sector offshore borrowing, the government in September 1991 set up a cabinet-level team to oversee foreign borrowing. The team is charged with reviewing applications for foreign commercial credits to finance projects in which the government or a state-owned enterprise is involved. The announcement of the team's formation stated that financing for purely private projects is not directly affected. The team is also charged with prioritizing the use of offshore funds by project and with establishing ceilings for government total borrowing by fiscal year. In October 1991 the team announced guidelines on public and private sector foreign commercial borrowing through FY 1995/96 ranging from $5.6 to $6.5 billion total per year. It also decided to defer four large projects in the petroleum sector with a total cost of $9.8 billion. 5. Significant Barriers to U.S. Exports By Indonesian law, foreign companies cannot engage in wholesale or retail distribution of foreign or domestic goods, only Indonesia companies have this right. An Indonesian company is defined as comprised of 51 percent Indonesian ownership and a board of directors consisting of mostly Indonesian nationals. Foreign firms must select an Indonesian agent or distributor to market their products in Indonesia. The foreign company may only appoint one sole agent for the entire country, while an Indonesian firm may enter into several sole agency agreements. Import Licenses: Since 1986, import licensing requirements have been relaxed in a series of deregulation packages, the most recent of which were issued in May 1990 and June 1991. Items still subject to import licensing include some agricultural commodities (rice, sorghum, sugar), alcoholic beverages, and some iron and steel products. Remaining import licensing requirements may be waived in some cases for companies importing goods to be incorporated into subsequent exports. The importation of most types of completely built-up passenger vehicles is forbidden. Tariffs and surcharges have often replaced licenses as the preferred method of protecting certain domestically produced goods. As trade and investment market-opening has progressed, accompanied by more rapid economic growth, U.S. exports to Indonesia have increased. Services Barriers: Services barriers abound, although there has been some loosening of restrictions, particularly in the financial sector. Foreign banks, securities firms, and life and property insurance companies are permitted to form joint ventures with local companies; in all cases, the capitalization requirements are higher than for domestic firms. Foreign companies incorporated in Indonesia may issue stocks and bonds through the capital market. Foreigners are permitted to purchase up to 49 percent of all non-bank shares listed on the stock exchange. Foreign attorneys may serve as consultants and technical advisors. However, attorneys are admitted to the bar only if they have graduated from an Indonesian legal faculty or from an institution recognized by the government as equivalent. Foreign accountants may serve as consultants and technical advisors to local accounting firms. Air express companies are not permitted to own equity in firms providing courier services, although they may arrange with local firms to provide services in their name and provide expatriate staff to the local firms. Indonesia imposes a quota on the number of foreign films which may be imported in a given year and restrictions are placed on their distribution within the country. All U.S. films must be imported by a group of six fully Indonesian-owned companies. In September 1990 the Motion Picture Export Association of America established a representative office in Indonesia. U.S. film producers would like to distribute their films directly or, as an interim measure, establish joint ventures for this purpose. Standards, Testing, Labelling, and Certification: In May 1990 the government of Indonesia issued a decree which stated that the Department of Health must make a decision within one year of receiving a complete application for registration of a new foreign pharmaceutical product. Under the national drug policy of 1983, a foreign firm may register prescription pharmaceuticals only if they both incorporate high technology and are products of the registering company's own research. Foreign pharmaceutical firms have complained that copied products sometimes become available on the local market before their products are registered. Investment Barriers: Although deregulation has reduced the difference in treatment between foreign and domestic investors, national treatment for foreign investments does not exist. With the qualified exception of new investment on Batam Island, foreign investment must be in the form of joint ventures. Usually with minimum Indonesian equity of 15 percent. With very limited exceptions, foreign partners must divest over a period of time to achieve majority Indonesian ownership, according to the law. Although wholesale distribution of products manufactured by a joint venture is permitted, retailing is closed to foreign investors. Most foreign investment must be approved by the Capital Investment Coordinating Board (BKPM). Line departments handle investment in the oil and gas, non-oil minerals, financial, and forest concession sectors. BKPM maintains a list of sectors closed to further foreign and/or domestic investment. There are several provisions under which foreigners may exploit or occupy land in Indonesia, but only Indonesians may own land. There are numerous restrictions on the employment of expatriates by both domestic and foreign/joint venture firms. Government Procurement Practices: Most large government contracts are financed by bilateral or multilateral donors who specify procurement procedures. For large projects funded by the government, international competitive bidding practices are generally followed. Under a 1984 Presidential Instruction ("Inpres-8") on government-financed projects, the government generally requires concessional financing which at least meets the following criteria: 3.5 percent interest and a 25 year repayment period which includes 7 years' grace. Foreign firms bidding on certain government-sponsored construction or procurement projects must agree to purchase and export the equivalent in selected Indonesian products. Government departments and institutes and state and regional government corporations are required to utilize domestic goods and services to the extent they are available (this is not mandatory for foreign aid-financed goods and services procurement). An October 1990 government regulation exempts state-owned enterprises which have offered shares to the public through the stock exchange from government procurement regulations; as of October 1991 one such enterprise had made a public offering. 6. Export Subsidies Policies Indonesia has joined the GATT Subsidies Code and eliminated export loan interest subsidies as of April 1, 1990. As part of its drive to increase non-oil and gas exports, the government permits restitution of VAT paid by a producing exporter on purchases of materials for manufacturing export products. Exemptions from or drawbacks of import duties are available for goods incorporated into exports. 7. Protection of U.S. Intellectual Property Indonesia is a member of the World Intellectual Property Organization and is a party to certain sections of the Paris Convention for the Protection of Intellectual Property. It is not a signatory to the Berne Convention for the Protection of Literary and Artistic Works, but is considering adhering to it. Indonesia has made progress in intellectual property protection, but it remains on the U.S. Trade Representatives's Special 301 "watch list" under the provisions of the 1988 Omnibus Trade and Competitiveness Act. Patents: In November 1989 Indonesia enacted its first patent law which came into effect on August 1, 1991. Implementing regulations clarified several areas of concern, but others remain including compulsory licensing provisions, a relatively short term of protection, and a provision which allows importation of 50 specific products by non-patent holders. The patent law and accompanying regulations include product and process protection for both pharmaceuticals and chemicals. Trademarks: The government has submitted to Parliament a trademark bill which it hopes will become law by April 1992; in the interim, a new trademark regulation broadening the definition of well-known marks was issued in May 1991. Several U.S. companies have trademark cases pending before the Indonesian Supreme Court. The new law is expected to improve significantly existing law which makes cancellation of trademarks registered in bad faith difficult after a nine-month opposition period. Copyrights: On August 1, 1989 a bilateral copyright agreement with the United States went into effect extending national treatment to each other's copyrighted works. Enforcement of the ban on pirated audio cassettes and textbooks has been vigorous; in September 1991 the government initiated a crackdown on pirated videos. The government has also conducted raids against software pirates, prompting retail outlets to take pirated material off their shelves. The government has demonstrated that it wants to stop copyright piracy and that it is willing to work with copyright holders toward this end. Enforcement to date has significantly reduced losses from pirated property, but problems still exist. New Technologies: Biotechnology and integrated circuits are not protected under Indonesian intellectual property laws. Indonesia has, however, participated in a World Intellectual Property Organization conference on the protection of integrated circuits and is considering introducing legislation. Impact: It is not possible to estimate the extent of losses to U.S. industries due to inadequate intellectual property protection, but U.S. industry has placed considerable importance on improvement of Indonesia's intellectual property regime. 8. Worker Rights a. The Right of Association Private sector workers, including those in export-processing zones, are free to form or join unions without previous authorization, but in order to bargain on behalf of employees a union must meet the requirements for legal recognition and register with the Department of Manpower. Less than 6 percent of the 76 million member work force is organized. The All Indonesia Workers Union (SPSI), which groups together private sector workers, is the only recognized intersectoral trade union body. Unions draw up their own constitutions and rules and elect their representatives under close government scrutiny. All unionized workers, with the exception of civil servants, have a legal right to strike. With a few exceptions, civil servants and employees of state enterprises must belong to the Indonesian Corps of Civil Servants (KORPRI), a nonunion association, and do not have the right to strike. By government regulation, a separate and compulsory dispute resolution and appeals process exists for civil servants and public employees to protect their interests. b. The Right to Organize and Bargain Collectively Collective bargaining is provided for by law, but only registered trade unions can engage in it. Once an employer is notified that 25 employees have joined the union, it is under a statutory obligation to bargain. Workers can organize without restriction in private enterprises. There are no laws which prevent bargaining from taking place in export processing zones, but no companies in the zones which have SPSI units have negotiated collective bargaining agreements. If the State has a partial interest, the enterprise is considered to be in the public domain, but this does not legally limit organizing. There is a significant number of government/private joint ventures which have labor unions and bargain collectively. Regulations forbid employers from harassing employees because of union membership. c. Prohibition of Forced or Compulsory Labor Forced labor is strictly prohibited. d. Minimum Age for Employment of Children The Department of Manpower acknowledges that there is a class of children under age 14, which is the legal minimum age for employment, who, for socio-economic reasons, must work. Special protections exist for children aged 7 to 14 and such employment must be with the permission of the child's parent or guardian. Employers are required to ensure that these children have access to junior high education within the framework of the compulsory schooling law. The Department of Manpower conducts periodic inspections and can impose sanctions for violations. e. Acceptable Conditions of Work The law establishes 7-hour workdays and 40-hour workweeks with a half-hour of rest for each 4 hours of work. Minimum wages are established by region by Wage Councils working under the supervision of the National Wages Council. An extensive body of labor law and regulation provides workers with vacation pay, maternity leave, public holidays, overtime and sick pay, severance and service pay, etc. Workers also receive transportation and food allowances and holiday bonuses. Workers in more modern facilities receive health benefits, social security contributions, and free meals. An extensive body of law and regulation provides for minimum standards of industrial health and safety. f. Rights in Sectors with U.S. Investment Application of legislation and practice governing worker rights is largely dependent upon whether a particular business or investment is characterized as private or public. U.S. investment in Indonesia is concentrated in the petroleum and related industries, primary and fabricated metals (mining), and pharmaceuticals sectors. Foreign participation in the petroleum sector is largely in the form of production sharing contracts between the foreign companies and the state oil and gas company, Pertamina, which retains control over all activity. All employees of foreign companies under this arrangement are considered state employees and thus all legislation and practice regarding state employees generally applies to them. Employees of foreign companies operating in the petroleum sector are organized in KORPRI. Employees of these state enterprises enjoy most of the protection of Indonesian labor laws but, with some exceptions, they do not have the right to strike, join labor organizations, or negotiate collective agreements. Some companies operating under other contractual arrangements, such as contracts of work and, in the case of the mining sector, cooperative coal contracts, do have unions and collective bargaining agreements. Regulations pertaining to child labor and child welfare are applicable to employers in all sectors. Employment of children and concerns regarding child welfare are not considered major problem areas in the petroleum and fabricated metals sectors. Legislation regarding minimum wages, hours of work, overtime, fringe benefits, health and safety etc. applies to all sectors. The best industrial and safety record in Indonesia is found in the oil and gas sector. Extent of U.S. Investment in Goods Producing Sectors U.S. Direct Investment Position Abroad on a Historical-Cost Basis - 1990 (Millions of U.S. Dollars) Category Amount Petroleum 3,209 Total Manufacturing 135 Food & Kindred Products (D) Chemicals & Allied Products 72 Metals, Primary & Fabricated 10 Machinery, except Electrical (D) Electric & Electronic Equipment -1 Transportation Equipment 0 Other Manufacturing (D) Wholesale Trade (D) TOTAL PETROLEUM/MANUFACTURING/WHOLESALE TRADE (D) (D)-Suppressed to avoid disclosing data of individual companies Source: U.S. Department of Commerce, Survey of Current Business August 1991, Vol. 71, No. 8, Table 11.3