INDONESIA

General Information

Economic Indicators

Trade Indicators

Economic Overview

The Asian economic crisis lead to a decline in the value of the rupiah and a contraction of the economy with real GDP growth contracting by 13.2 in 1998. 1 The collapse of the financial markets resulted in falls in economic activity in most major sectors, including trade-related and financial
services industries. 2

Indonesia has a free-market economy dominated by the private sector. The government does play a role in the economy, however, through state-owned firms and the imposition of price controls in
selected industries. 3

The onset of the crisis in 1997-98 spurred hyperinflation driven by, a collapsing rupiah, a breakdown in production and distribution, and a rapid expansion of the money supply as government sought to maintain various subsidies programs leading to 57.6% inflation in 1998. 4

Regulatory Environment

Deregulation has been a key element of Indonesia's macro-economic policies over the past decade. "In 1986 the Indonesian government began reforming its trade policy to increase competition in the economy, open up domestic companies to foreign involvement, and increase opportunities for international trade." 5

Until the mid-1980s, Indonesia used a licensing system to restrict imports. Intended to protect infant industries, the system provided enormous profits to the licensees and raised input costs for domestic industries. Since 1986, however, the government has steadily replaced such non-tariff barriers with tariffs, which have. in turn, been reduced. 6

Import tariffs range from five to 200%, with the majority falling between 5% and 40%. The simple average import tariff is approximately 20%. The average effective tariff is lower, however, due to many exemptions. Approximately 50% of potential duties and taxes are exempted, including capital goods for approved investments, imports used to produce exported goods, and imports exempted by the Ministry of Finance. 7

Indonesia's commitments as a member of AFTA, APEC and the WTO should cause tariffs to fall steadily between now and 2020. While these agreements provide frameworks for trade reforms, the most powerful impetus for further reductions in both tariff and non-tariff trade barriers will be the need to maintain the competitiveness of Indonesia's import-dependant manufacturing sector. 8

In 1994, requirements for minimum equity in most foreign investments were eliminated. Foreign investors who open with 100% equity must divest some percentage of their holdings after 15 years.This appears to be as little as 1% and may be accomplished through the stock market. In those sectors requiring some Indonesian equity, joint venture investments must include a 5% minimum local equity, but need not divest any further. 9

Foreign investors may not hold majority ownership in retail operations, although franchise, licensing,and technical service agreements are common. Foreign companies are also forbidden to provide domestic distribution services. Foreign companies manufacturing in Indonesia may own up to 80 percent of companies that distribute their locally produced goods at the wholesale level. Foreign companies may also post technical advisers to Indonesian companies that distribute their products at the retail level. 10

In the long term the Indonesian economy offers many opportunities for the foreign manufacturer and investor. Whilst the government has exercised control over the broad pattern of economic development, the economic crisis is brought with it wide sweeping economic reforms and a liberalisation of key sectors of the economy and financial markets. Larger sectors of the economy - particularly mining, telecommunications and vehicle manufacture are opening to foreign investment.

Despite the region-wide financial crises, new foreign direct investment (FDI) commitments remained strong in 1997, 12 although since the onset of the economic crisis many FDI funded projects have either been put on hold or abandoned. 13

Current Process of Liberalisation

Although economic restructuring, trade and investment deregulation, and financial sector reform has slowed somewhat due to the financial crises sweeping the region, there is every expectation that the process will continue as a recovery occurs in the economy over the next few years. A total of 66 banks have been closed since 1997, with 12 others having been nationalised. 14

In 1986, the Indonesian government began a program of trade policy reform. A number of periodic deregulation packages have eliminated or reduced tariff and non-tariff barriers, thus increasing competition in the economy. The deregulation package, issued in May 1995, was the most significant since 1990. It reduced the average tariff by nearly 25%, and introduced a long-range approach to reform, laying out periodic tariff reductions through to the year 2003. 15

Indonesia has made considerable progress in trade and investment deregulation. In mid-1994, Indonesia lowered investment barriers to among the lowest in the region. In May 1995, the government unveiled a comprehensive tariff reduction package that covered roughly two-thirds of all traded goods. The last major round of cuts was in July 1997, when the government lowered tariffs on 1600 items. 16 The country's agreement with the IMF in January 1998, quickened the pace of many of these tariff cuts. 17

Some non-tariff barriers were also removed in the May 1995 package. Several sectors that had previously been tightly restricted by the government were opened to new investors. 18

Foreign investors have been permitted 100% equity in most sectors since 1994 under Government Regulation 20/1994. The same legislation opened a number of economic sectors previously closed to foreign investment, removed minimum investment requirements and effectively abolished compulsory
divestiture rules. 19

1. Country Profile: Indonesia: 1999-2000, (The Economist Intelligence Unit, London, 1999), p. 27.
2. Ibid..
3. Trade Compass Country Commercial Guides,
   (http://www.tradecompass.comAibrary/books/com_guide/).
4. Country profile... 1999-2000, p. 28.
5. 1996-1997 World Trade Almanac, (World Trade Press, California, 1996), p. 361.
6. Country Reference: Investing, Licensing & Trading Conditions in Indonesia: 1998, (The Economist Intelligence Unit, London, 1998), p. 48.
7. 1996-1997 World Trade Almanac, (World Trade Press, California, 1996), p. 361.
8. Country Reference..., p. 48.
9. Trade Compass....
10. Ibid..
11. Western Australia's Indian Ocean Strategy, (Western Australia Department of Commerce and Trade, 1998).
12. Country Reference..., p. 11.
13. Country Profile...1999-2000, p. 28.
14. Ibid., p. n.
15. Trade Compass....
16. Country Reference..., p. 50.
17. Ibid..
18. Ibid..
19. lbid., p. 14.