Indonesia Economic Situation

Indonesia Economic Situation

The Indonesian economy grew less dependent on oil and agriculture during the Soeharto New Order. The severe contraction of Indonesia's economy at the time of the 1997 Asian financial crisis, however, highlighted the shortcomings of the New Order economic model (increasingly wasteful use of foreign investment, declining international competitiveness). Indonesia's GDP contracted by 13% in 1998. GDP per capita in 2000 was US$671, well down on the 1996 level of US$1,150. The economy has shown signs of recovery more recently, and GDP per capita (PPP) was estimated at US$3,600 in 2007. Economic growth has gradually increased from 3.3% in 2001 (led by the export sector) to 6.3% in 2007; the figure for 2008 is estimated to be about 6.1%. Services (which represent 42% of GDP), manufacturing (28%), agriculture (15%) and mining (9%) account for most of the origins of Indonesia's GDP.

The Indonesian Government initiated a wide-ranging economic reform programme in 1998, with strong IMF advisory and financial support, to address the impact on Indonesia of the 1997 Asian financial crisis and to lay the foundations for long-term sustainable growth. On 1 January 2004 Indonesia graduated from the IMF's lending programme, and in early 2007 took the decision to disband the Consultative Group on Indonesia, a donor forum of which New Zealand was a member, preferring instead to focus on bilateral development assistance. The World Bank welcomed this step as a further sign of Indonesia's renewed economic confidence.

Despite improved macroeconomic conditions, prospects for a sustained high level of economic growth will depend to a large extent on the pace of critical economic reforms, particularly those concerning investment, tax and labour laws, and the economic impact of decentralisation. All of these factors are relevant to the restoration of investor confidence, which the IMF regards as central to Indonesia's long-term economic recovery. The Investment Law passed by the Parliament in early 2007 is seen as a crucial step in stimulating renewed investor interest. Indonesia operates a relatively open economy, but non-tariff barriers (NTBs) remain an impediment to trade. With a strong programme of administrative decentralisation in place, there are sharp contrasts between the economies of Indonesia's 33 provinces. Certain provinces with a major export resource base (particularly hydrocarbons or minerals, but also specialist agricultural commodities) are becoming markedly wealthy.

The impact of the current global economic turmoil has been felt in Indonesia, but aside from the collateral risks of capital outflow due to tighter global liquidity conditions, the country's fundamentals and economic structure mean it is not in apparent danger right now. Indonesia has been feeling the effects principally through pressure on the value of the rupiah, a significant weakening of the stock market, and falling commodity prices. Policymakers are wary, however, about prospects for 2009, when worsening economic conditions in Indonesia's key export markets may lead to significant effects on the domestic economy, such as large-scale job losses. The government has developed a number of policy responses to that threat, including a package of fiscal stimulus.