ECONOMIC SPOTLIGHT - INDONESIA'S ECONOMY
Indonesia heads for general elections in
six weeks' time with its economy in the worst shape in 20
years, economists and officials said.
    The government expects no spillover of "people power" from
the neighbouring Philippines to unsettle the 20-year rule of
President Suharto, victory for whose ruling Golkar party in the
coming parliamentary elections is assured.
    However, Western diplomats said it is the country's
deteriorating economic position that is the main threat to its
stability.
    Last year's collapse in oil prices dealt a heavy blow to
Indonesia, halving its revenue from oil and gas exports to 6.5
billion dlrs last year from 12.4 billion in 1985. Oil and gas
account for 70 pct of export income.
    The result is that in the run-up to April 23 elections,
Suharto, far from wooing his 168 mln countrymen with pay
increases or tax cuts, is busy slashing budget spending.
    The government has also recently increased transport fares
and frozen the pay of the civil service and the army for the
second year running, despite inflation now estimated at 8.8
pct.
    The current account deficit rose to 4.09 billion dlrs in
1986 from 1.8 billion in 1985, while the debt service ratio
widened to 33.2 pct for 1987 from 25 pct in 1986.
    Foreign debt repayments of 4.6 billion dlrs account for
almost a third of the 1987/88 budget.
    A recent U.S. Embassy report on the economy said 1986 gross
domestic product growth was the lowest since the mid-1960s when
Suharto came to power. Western economists said GDP registered
nil growth or contracted last year after 1.9 pct growth in
1985, and predicted only a one pct rise this year.
    In its efforts to return to growth seen in the oil-boom
years of the 1970s when the economy grew an average seven pct,
the government is now relying more on foreign borrowings.
    Indonesia has asked foreign governments to finance its
share of new projects being built with overseas money, because
it cannot afford even to meet local costs.
    In the last three months Indonesia has taken out new loans
totalling 1.55 billion dlrs, on top of its external debt of 37
billion dlrs. Western bankers said more will be needed, and the
country now ranks sixth among Third World debtors.
    A 350 mln dlr commercial loan signed in Tokyo in December
was followed in the first week of February with a 300 mln dlr
loan from the World Bank to support the balance of payments.
    Last month, Japan's Export-Import Bank agreed a 900 mln dlr
loan to meet Indonesia's share of 21 World Bank projects which
would otherwise have been scrapped or postponed. More loans are
on the way, including two more from the World Bank worth a
total 300 mln dlrs for roads and irrigation.
    U.S. Ambassador Paul Wolfowitz said in a recent speech that
economic growth remains the key to preserving Indonesia's
fundamental stability.
    The largest Moslem nation in the world, Indonesia has so
far avoided some of the more extreme paths of other Moslem
countries. But the World Bank has warned that mounting
unemployment could start causing severe social strains unless
it is tackled.
    It said in its annual report on Indonesia last June that
unless economic growth is revived, unemployment could reach
what it termed "unacceptable levels."
    Unemployment was officially put at 4.8 pct at the end of
last year, but those considered underemployed number around 35
pct.
    What path to take appears to be a matter of some dispute
within Suharto's government, with his Western-trained
technocrats advocating more of the classic remedies supported
by the international financial community.
    But another group supports a protected economy, with more
import substitution, the U.S. Embassy report said.
    The government devalued the rupiah by 31 pct against the
dollar last September to help exports and curb imports, and is
currently working on a series of measures to further encourage
foreign investment and boost exports outside the oil sector.
    The direction Suharto takes could affect Indonesia's
ability to raise new loans in the future, Western bankers say.
    So far, despite three packages of economic measures over
the past nine months, he has not touched key monopolies that
are linked to businesses controlled either by his family or by
business associates, diplomats and bankers say.
    Diplomats and investors are now looking for action on
monopolies and the loss-making state sector as signs that
Suharto is serious about tackling the country's problems.
 REUTER
