RESTRICTED Report No. EAP-22 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION INDONESIA: Z W C 0 ;~ m CO -i INVESTMENT AND GROWTH PERSPECTIVES r- C IN THE 1970's > 7 - - O ZM A FIRST REPORT O C n O March 25, 1971 East Asia & Pacific Department CURRENCY EQUIVALENTS U.S.$ 1.00 Rp. 378 1 rupiah U.S.$ 0.003 1 million rupiahs U.S.$ 2,646 PREFACE At the.IGGI meeting in December 1970 it was noted that the recent rescheduling of the pre-1967 external debts had resolved a major uncertainty concerning Indonesia's future resource require- ments, but it had not yet been possible to investigate the longer- term investment needs and external aid requirements. IGGI members expressed their interest in a study on this subject and the Bank undertook to attempt an assessment by early 1972, in cooperation with the Government, of these longer-term perspectives. It was agreed that, if possible, by the time of the next IGGI meeting in April 1971 a preliminary report would be made available. The following report represents an initial attempt to identify the issues involved in such an assessment of longer-term requirements and suggests an approach. The report therefore includes, in addition to the usual updating of information on recent developments in the economy, a discussion of investment plans and projects already being undertaken or prepared and of alternative growth patterns in the Indonesian economy on varying assumptions, and an indication of the ga:ps and deficiencies in the available data. The next stage of the investigation will necessarily concentrate on major policy issues and the problems of organization and management which lie behind the projections presented here. The long-term projections of the report are therefore limited in scope and intended to focus attention of IGGI members on the major issues involved and the spectrum of alternative growth patterns. The report was prepared in Djakarta in February/March 1971 by the following headquarters staff members in association with the Resident Mission in Indonesia: Wouter Tims (Chief of Mission); Graeme J. Thompson (Chief Economist); Rogelio G. David (Economist); Jeffrey Balkind (Economist); Edwin R. Lim (Economist); Itasu Sakura (Economist); and Nolita Pontanilla (Mission Secretary). TABLE OF CONTENTS Page No. BASIC DATA . . . . . . . . . . . . . . . . . . . . . . SUMMARY AND CONCLUSIONS.. . . . . . . . .. . i-u I. Recent Economic Developments. . . . . . . . . . . 1 II. Development Perspective: Private Investment in the Medium Term. . . . . . . . . . . . . . . 10 II. Public Sector Programs. ............ 24 IV. Alternative Patterns of Long-term Growth. . . . . 4h ANNEX 1 Simulation Model for Medium-term Projections (with two appendices) STATISTICAL APPENDIX BAS IC DATA Area: 1,904,639 square kilometers Land use as percentage of total area: 1. Estate agriculture 1.1 2. Other agriculture 13.1 (a) Food crops (9.3) (15) Cash crops (3.8) Population (1970): 121.1 million Density per square kilometer 64 Estimated rate of growth (1965-1970) 2.5 percent Density per square kilometer in Java 592 Political Status: Unitary Republic, member of the United Nations and the Association of South-East Asia Nations (ASEAN) Gross Domestic Product (1970): Rp. 3,328 billion Per Capita GDP (a) Official $ 73 (b) Estimated $ 80 - 100 Foreign Exchange Reserves: December 1969 December 1970 % Change ($ million) ($ million) Gross 119 157 Net -86 -51 (Rp. billion) (Rp. billion) Total Money Supply 180.0 243.h 35.2 Time Deposits (State Banks) 33.6 50.4 50.0 Price Index (September 1966 = 100) 575 626 8.9 Public Sector Operations (Rp. billion): 1969/70 1970/71 1971/72 Actual Est.Act. Estimates Government Current Receipts 243.6 34h 16 Government Current Expenditure 216.5 310 364 Current Budget Surplus 27.1 34 52 Counterpart Transfers 69.2 73 90 Project Aid Disbursements 23.0 28 53 Development Expenditures 119.3 135 195 - 11 - External Public Debt ($ million): Outstanding as per June 30, 1970 3,516 Debt Service Liability in 1970/71 81 Debt Service as % of Exports 9 Balance of Payments ($ million): 1969/70 1970/71 1971/72 Actual Est.Act. Estimates Exports of Goods and Services 1,039 1,196 1,420 Imports of Goods and Services 1,h43 1,612 1,926 Current Account Deficit -404 -416 -506 Commodity Concentration of Exports (1970/71): Rubber 22 percent Oil 37 percent 方州  SUMHARY AND CONCLUSIONS i. The acceleration of economic activity described in the last Bank report (EAP-19a)'of November 27, 1970, appears to have continued in recent months. Exports increased more rapidly than expected earlier. The demand for imports towards the end of the year was stronger than had been expected and this, combined with somewhat lower availability of program aid, led to a modest decline in foreign exchange reserves. The strongest force behind the growth of the economy was the rapid in- crease of fixed investment and development expenditures, in both the public and the private sectors. The substantial rise in production and export earnings has been another major dynamic factor in the growth of the economy. ii. Revised projections of the balance of payments and of central government revenues and expenditures for fiscal year 1971/72 leave the estimate of aid requirements unchanged as compared to the earlier estimate. In line with lower tax receipts on international trade during 1970/71, the estimates of revenues from this source in 1971/72 may be further reduced, but this should be more than compensated by expected higher budget receipts from the oil sector after the recent international price increase for crude oil. This is expected to permit a larger surplus in the routine budget which would compensate for this shortfall and permit the implementa- tion of the development budget as planned. iii. Significantly higher estimates of gross and net oil exports as a consequence of the higher international price of crude oil together with a higher forecast of export earnings from other goods and services which has also been revised upwards, suggest a new projection of 1971/72 export earnings 15 percent higher than 1970/71. The higher actual import level in 1970/71 has also necessitated an upward revision of estimated import demand in 1971/72. The loss of foreign exchange reserves, including Indo- nesia's share of Special Drawing Rights (SDR), of the current year is planned to be compensated by a larger increase in reserves in 1971/72. This leaves a requirement of program aid disbursements of $370 million in 1971/72 and an equal amount of commitments, perhaps with a somewhat larger component of general program aid than the originally requested $160 million. iv. It is becoming possible, on the basis of information now avail- able on developments over the last three years, to draw some conclusions about possible patterns of future investment activity. For the next few years, through the middle of the decade of the 1970's, a large part of prospective investment activities in the public and private sectors has already been determined by project commitments, approvals and activities already begun. In the private sector, foreign investment reached over $200 million in 1970, including the oil and hard minerals sectors, and present contracts and disbursement schedules indicate that in 1971 an increase by about 25-30 percent can be expected. In the years immediately after 1971 foreign private investment is expected to continue to grow, but at a less rapid rate if investments in mining, which make up more than half of the total, stabilize at about the present level. - ii - v. Private investment under the Domestic Investment Law has not yet reached a high disbursement level in comparison to approvals given to date, and an accurate assessment of the current situation and prospects is ham- pered by lack of information. Nevertheless, from the data that are avail- able a considerable growth of activity can be projected, largely in the medium-scale manufacturing sector and in agriculture, notably private estates. Investment under both domestic and foreign investment laws is projected to grow at a rate of about 17 percent per annum through 1975. vi. An increase at the rate of about 12 percent per annum after 1971 for public sector development expenditures appears to be in line with dis- bursements expected from project aid and the possibilities for the mobili- zation of domestic budget resources. An increasing proportion of Rupiah development resources is being used for projects financed in part by for- eign project aid. About one-third of project aid is being used by produc- tion enterprises in the public sector and the remaining two-thirds is directed to infrastructure and service programs. The preparation of new programs for investment and the promotion of productive activity by way of sector studies and pre-investment studies is in hand in many economic fields, and they are already producing a large volume of high priority project proposals. Thus, a much firmer foundation is being laid for the second five-year plan than existed for the first. vii. Pre-investment studies have not yet reached a stage where their results can be used for long-term planning which relates output and other economic objectives to specific investment programs. Nor at this stage can analysis be made of the implications of such programs for the balance of payments, regional development or employment. As a first step towards the indentification of growth trends and possibilities for the Indonesian economy, a model designed for the purpose has been used to test alternative macro-projections of some of the main variables affecting economic growth. The preliminary results of the work suggest that satisfactory rates of growth in the decade ahead are dependent on an inflow of external resources, public and private, substantially larger than at present. But the work is at too early a stage even for this general conclusion to be regarded as firm. It goes without saying that the validity of this conclusion is in any case contingent on a continuation of the progress in the past few years toward rational economic policy and program formulation, and toward effec- tive program execution, continued devotion to the objective of economic growth, and greater concentration on the already pressing problem of employ- ment and the income distribution problems likely to emerge more vividly in the coming years. CHAPTER 1 RECENT ECONOMIC DEVELOPMENTS 1. The last Bank economic report (EAP-19a) of November 27, 1970, described developments during 1970/71 and prospects for 1971/72 as they appeared in October 1970; in the present report the review of current economic developments is therefore confined to a revision of the earlier estimates and projections wherever actual developments in the past 5 months indicate significant differences. The acceleration of economic activity noted previously continued in the last part of the year 1970; the growth of exports was even more rapid in the last quarter than in the preceding part of the year and imports also increased at a faster rate than before. Some of the indicators of economic change between calendar years 1969 and 1970 are presented in Table 1, below: Table 1: Main Economic Indicators, Calendar Years 1969 and 1970 Percentage 1969 1970 change Gross Exports ($ million) 995 1,204 21 Djakarta Price Index (Sept. 1966 = 100)(annual average) 545 612 12 Gross Aid and Private Capital Inflows ($ million) 325 487 50 Central Government Internal Revenues (Rp billion) 234 313 34 Bank Credit (increase, Rp billion)-a 22 60 -- Import of Goods and Services ($ million) 1,388 1,614 23 Routine Budget Expenditures /b (Rp billion, in 1970 prices) 225 275! 11 Development Budget Expenditures (Rp billion, in 1970 prices) 66 118 80 /a January - September /b Excluding ADO transfer 2. These indicators confirm the earlier assessment of 1970 as a year of considerable progress. Strong import demand in the latter part of the year put some modest pressure on foreign exchange reserves. This was somewhat accentuated by the fact that early in December the special exchange rate for program-aid imports was raised to the level of the gen- eral exchange rate with the consequence that demand for program-aid ex-- - 2 - change shifted somewhat to demand for non-aid exchange. Although credit measures designed to offset the relative unattractiveness of program-aid exchange were employed, their effect was limited by the necessity that credit expansion be restrained. The somewhat lower than projected use of program-aid also meant some short-fall in receipts of aid counterpart funds for use in development budget expenditure. 3. Estimates by the Central Bureau of Statistics put the growth of DGP in 1969/70 at approximately 5 percent in constant prices. Incomplete and also not fully reliable production data indicate that the growth of GDP in 1970/71 may have been approximately 8 percent. In 1970/71, the most significant growth of output appears to have been in mining, construc- tion and manufacturing; agricultural output appears to have increased by almost 4 percent. There was also an increase in imports of goods and services, with the result that the total resources available to the economy probably increased by approximately 9 percent. Estimates of the use of the resources available indicate that in real terms fixed investment may have increased by some 27 percent, exports of goods and services by 15 percent, and consumption by about 6 percent, the major part of the increase being in public rather than private consumption. 4. The estimated current account deficit in the balance of payments, excluding factor payments abroad, was only slightly larger than in 1969/70, indicating that the substantial increase in investment expenditures was largely financed by increased domestic savings in both the public and pri- vate sectors. Rough estimates suggest that aggregate domestic savings in 1970/71 may have grown to approximately 8 or 9 percent and investment in fixed assets to about 13 percent of GNP at market prices. Fiscal Performance and Prospects 5. Events in the last quarter of 1970 and current expectations for the first quarter of 1971 indicate some quite minor changes in the earlier estimates of 1970/71 revenues and expenditures, as well as in the budget es- timates for 1971/72. Table 2 below details revised estimates of government receipts for 1970/71 and 1971/72. Table 2: Routine Government Receipts 1970/71 and 1971/72 (in billions of Rupiahs) 1970/71 October February 1971/72 Estimate Estimate Oct. est. Budget Taxes on Income 120.2 121.4 144.0 143.6 Domestic Consumption Taxes 91.4 90.1 110.8 111.2 Taxes on International Trade 132.1 123.2 158.1 156.9 Non-tax Revenues 2.6 9.7 3.0 4.2 TOTAL 346.3 344.4 415.9 415.9 Source: Ministry of Finance - 3 - 6. As indicated, total receipts in 1970/71 are likely to be less than 1 percent (Rp 2 billion) smaller than estimated earlier. Import duties collected are likely to fall short of the October estimate by about Rp 8 billion despite the increase in total imports recorded in the last quarter of 1970, but this shortfall is expected to be offset by an increase of about Rp 7 billion in non-tax revenues. The shortfall in customs receipts is mainly attributable to a noticeable shift in imports from high duty consumer goods toward lower duty or duty-exempt capital goods. The increases in non-tax revenues consist mainly of profits from state enterprises. Receipts from sales and excise taxes are expected to be slightly lower than had been anticipated earlier, but receipts from taxes on domestic sales of petroleum products slightly higher. Total 1970/71 routine budget expenditures, as indicated in Table 3, are not expected to change from the earlier estimates. The surplus in the 1970/71 routine budget will accordingly be Rp 2 billion less than estimated earlier. Table 3: Routine Government Expenditures 1970/71 and 1971/72 (in billions of Rupiahs) 1970/71 1971/72 October February Estimates Estimates Oct. est. Budget Personnel Expenditures 135.1 137.5 163.9 165.9 Material Expenditures 63.7 58.9 72.2 67.2 Subsidies to Autonomous Regions 75.1 76.5 87.6 87.6 Debt Service Payments 26.1 26.1 35.2 37.2 Other Routine Expenditures 10.7 11.7 5.2 6.2 TOTAL 310.7 310.7 364.1 364.1 Source: Ministry of Finance 7. As indicated by Tables 2.and 3 estimates of total routine budget receipts and expenditures for 1971/72 are unchanged from those of October, although there are some minor changes of detail. The new figures are from the budget as presented to Parliament early in January. 8. Revised development budget estimates for 1970/71 and 1971/72 are shown in Table 4. As indicated by the table, total 1970/71 receipts are expected to be Rp 107 billion or Rp 9 billion lower than estimated earlier, reflecting principally lower aid counterpart receipts. Authorized expend- itures are unchanged signifying that some of the expenditures will not actually be made in the 1970/71 year and will be assimilated into the 1971/ 72 budget. The present estimates of development budget receipts and expend- itures are unchanged except for minor detail. 9. There is some uncertainty that the Rp 103.1 billion of aid counterpart receipts will materialize given present prices and margins for commodities imported under program aid. However, a shortfall in counterpart funds in 1971/72 may well be offset by a significantly larger surplus in the routine budget than was estimated earlier or is indicated in Tables 2 and 3. The prospect of the larger surplus arises out of the recent increases in crude petroleum prices which will result in an in- crease in Government revenues representing its share of profits from the production and export of crude petroleum. Table 4: Development Budget (in billions of Rupiahs) 1970/71 1971/72 October February Estimate Estimate Budget Resources 1. Routine Revenues 346.3 344.4 415.9 2. Routine Expenditure 310.7 310.7 364.1 3. Surplus on Routine Budget 35.6 33.7 51.8 4. Transfer of Counterpart Funds 80.2 73.2 103.1 5. Total Rupiah Development Resources 115.8 106.9 154.9 Uses Economic Sector 81.0 81.0 104.8 Departmental Programs (61.0) (61.0) (75.3) Regional Development (15.0) (15.0) (18.0) Government Share, Investment Credit ( 5.0) ( 5.0) (11.5) Social Sector 22.3 22.3 24.6 General Sector 12.5 12.5/ 10.8 Carry-over of 1970/71 Authorizations - -8.9/a 2.0/ BGR Program Losses - - 12.7 Total Uses 115.8 106.9 154.9 Source: Ministry of Finance /a In the development budget this carry-over will have to be assimilated into the sectoral allocation for 1971/72. lb Carry-over of 1970/71 authorizations above originally estimated bud- get resources. - 5- External Trade and Payments 10. Revised estimates of the balance of payments in 1970/71 and 1971/72 are summarized in Table 5. These revised estimates do not differ widely from those made in October. Although both exports and imports are now expected to be higher than had been estimated in-October, the net result is that the current account deficit in 1970/71 is likely to be $10 million lower than had been estimated earlier and approximately the same as that of 1969/70. Aid disbursements are likely to be significantly lower (by $93 million) than had been anticipated earlier. Although net capital inflow other than aid is likely to be higher than had been estimated, there is expected to be a minor loss of $13 million in foreign exchange reserves rather than the gain of $15 million forecast in October, both excluding Special Drawing Rights. Table 5: Balance of Payments, 1969/70 and 1970/71 (in millions of US dollars) 1969/70 1970/71 October Revised Actual Estimate Estimate Gross Exports /a 1,039 1,160 1,196 Imports of Goods and Services- 1,443 1,586 1,612 Current Account (deficit = -) -404 -426 -416 Program Aid Disbursements 307 364 291 Project Aid Disbursements 52 130 110 Net Other Items (including debt service) -33 -53 2 Changes in Reserves (increase = -)-- 78 -15 13 /a Including investment income payments (see Table 3.1 of the Statistical Appendix). /b Excluding SDR. 11. As indicated in Table 5, 1970/71 total exports, which in October were estimated at $1,160 million, are now expected to-reach $1,196 million, and to be 15 percent rather than 12 percent higher than in 1969/70. Gross oil exports are expected to be $447 million ($7 million more than estimated in October) and 18 percent higher than in 1969/70. Non-oil exports, esti- mated at $720 million in October, are now expected to reach $749 million and will thus be almost 14 percent higher than in 1969/70. - 6 - 12. Imports of goods and services in 1970/71 are also now expected to be higher than had been estimated in October, though by not even 2 per- cent. Imports, excluding investment income payments, are now expected to be $1,778 million, or 9 percent higher than in 1969/70. 13. A larger change in the 1970/71 estimates is in aid disbursements which are now expected to be $401 million rather than the $494 million fore- cast in October, principally as a result of lower disbursements of program aid than had been anticipated. These occurred in part because a substantial part of the commitments was made only in March 1971, too late to affect disbursements in the 1970/71 fiscal year. 14. Data on the commodity composition of imports were not available in October but have become available recently for 1969/70 and a substantial part of 1970/71. These data are the basis for the summary estimates pres- ented in Table 6 for 1969/70, 1970/71 and, as projected, 1971/72. They indicate for 1970/71 as compared with 1969/70: (a) a measurable decline in imports of consumer goods, especially foodgrains; (b) no significant change in the general category of production materials, but a decline in fertilizer imports and an increase in production materials for industry; (c) a large increase in imports of investment goods. The decline in im- ports of foodgrains appears to reflect increased domestic output since demand undoubtedly increased and prices were relatively stable. The decline in imports of fertilizer reflects the availability of sizeable stocks. The 10 percent increase in imports of production materials for industry reflects the increase in manufacturing output and the 47 percent increase in invest- ment imports obviously reflects the sharp increase in construction and other investment activity. 15. The currently projected 1971/72 imports are higher than those projected in October partly because 1970/71 imports have turned out to be higher than then-estimated and partly because the newly available data on the composition of imports provide a better basis for projection. Table 7 summarizes the current projections. As it indicates, imports of goods and services in 1971/72 (excluding investment income payments and oil sector debt service) are now expected to total $1,744 million. This figure is 16 percent higher than the current estimate of 1970/71 imports and 2 percent higher than the 1971/72 figure projected in October. 16. Imports of consumer goods other than foodgrains are projected at rates of growth somewhat below those in the current year; this reflects principally the expansion of domestic textile production and the consequent reduction of imports of finished textiles. Industrial materials are pro- jected at a somewhat more rapid rate of growth than in 1970/71 as domestic industry dependent on imported production materials expands its output. The projected increase in imports of the oil sector is related to the anticipated growth of output in the sector. The category of investment- related imports (other than for the oil sector) reflects principally the - 7 - anticipated disbursements of project aid, private capital inflows (other than in the oil sector) and-the foreign exchange content of disbursements under the medium-term investment credit program. Table 6: Imports (c. and f.) by Commodity Groups, 1969/70-1971/72 (in millions of US dollars) 1969/70 1970/71 1971/72 Actual Estimate Projection Consumer Goods 417 376 405 Foodgrains 212 148 160 Other food 51 56 60 Other consumer goods 154 172 185 Production Materials 470 467 535 Agricultural inputs 55 27 30 Industrial inputs 229 250 285 Materials, oil-producing sectoYa 101 115 145 Services, oil-producing sector- 85 75 75 Investment-related Imports 386 567 713 Investment Income Payments 109 134 182 Other Services (non-oil, excl. freight) 106 119 131 Total Imports 1,488 1,663 1,966 /a Including oil sector's debt service payments. 17. As already stated, total 1971/72 import demand thus estimated aggregates $1,744 million, or an increase of 17 percent over currently estimated 1970/71 imports of goods and services. A substantial part of this increase -- more than two-thirds -- is expected to be financed from additional export earnings. On the basis of actual developments in 1970/ 71 when non-oil exports increased by some 14 percent it seems likely that they will increase by approximately 12 percent in 1971/72 and thus amount to $840 million. A major increase is expected in the value of oil exports as a result of the price increases expected to follow upon the recent Teheran agreement between the OPEC and the major oil companies. Prices realized by companies exporting Indonesian crude oil may in 1971 be some 30 percent higher than in 1970. The result, taking into account currentl9 anticipated increases in the volume of output is an estimated increase of more than 30 percent in oil exports to the level in 1971 of $580 million. This figure is only 16 percent higher than the one projected in October partly because the export volume then estimated was probably somewhat optimistic. - 8 - 18. Total exports in 1971/72 are thus expected to be $224 million or approximately 19 percent higher than in 1970/71. The net result of the current projections of exports and import demand is an anticipated current account deficit of $324 million which is slightly lower than that estimated in October and somewhat higher than that of 1970/71. Taking into account current estimates of debt service and the loss of foreign exchange reserves in the current year which necessitates a higher target for reserve accumulation in 1971/72, the 1971/72 financing gap remains as it was estimated in October (see Table 7). Table 7: Balance of Payments Summary, 1970/71-1971/72 (in millions of US dollars) 1970/71 1971/72 Percent Estimate Rev. Proj. Increase Gross Exports 1,196 1,420 19 Imports of Goods and Services 1,478 1,744 18 Investment Income Payments -134 -182 Current Account (deficit = -) -416 -506 15 Debt Service Payments- -120 -147 Direct Private Investment 103 135 Project Aid Disbursements 110 175 Short-term Credits, Errors, Omissions 19 - Changes in Reserves (incl. SDR) 13 -27 Sub-total -9 -46 Remaining Gap, equals Program Aid Disbursement 291 370 /a Including oil sector debt service payments and liabilities under hire-purchase arrangements. 19. Commitments of program aid during 1970/71 have slightly exceeded the requested amount of $340 million and are expected to amount to $341 million. General program assistance reached a total of $1.41 million, short of the request by $9 million. Food aid at $150 million results in disbursements of $126 million; the increase of the pipeline by $24 million hides the fact that during the year some reduction of the pipeline actually occurred, more than compensated by a new commitment close to the end of the fiscal year. As the rice crop was favorable in late 1970, stocks in the hands of the Government have remained larger than was expected earlier, although some stock releases are necessary in the early part of 1971 to maintain a stable price of rice. With regard to the program aid which is used for imports of cotton and cotton yarn, actual commitments at $49 million are about equal to the requested amount. However, $27 million of these commitments were received only in March 1971; the disbursements of $27 million during the year therefore represent full use of all commit- - 9 - ments obtained before March, and of the opening pipeline as well. Total disbursements in 1970/71 are expected to amount to $291 million, consider- ably below the level projected for this year, but still $9 million above the level of commitments obtained until March 1971. The pipeline of program aid is expected to amount to $108 million by the end of the cur- rent fiscal year, of which more than half consists of commitments obtained in March 1971. When excluding the latter, there was a decrease of the pipeline over the year of some $9 million. 20. Disbursements of program aid in 1971/72 are projected at $370 million; this would meet counterpart fund requirements for the development budget and provide for the projected growth of imports. Commitments of this amount were requested at the December 1970 meeting of the I.G.G.I. and appear still to be appropriate in relation to the disbursement pro-- jection and the expected pipeline at the end of the current year. In terms of composition, some changes may need to be made depending on dev- elopments during the year. 21. Estimated food aid requirements of $160 million must be reassessed once estimates of the current wet season crop to be harvested in the spring of 1971 become available; if food aid requirements appear to be less, gen- eral program aid commitments should be increased in order to preserve the level of counterpart funds. With regard to cotton and yarn, absorption capacity may be limited to less than the projected level of $50 million and a similar adjustment as for food aid may be needed. Table 8: Program Aid Commitments and Disbursements, 1970/71 and 1971/72 (in millions of US dollars) General Cotton, Program Food Yarn Assistance Aid Aid Total Pipeline, 31/3 1970 42.7 7.6 7.7 58.0 Commitments 1970/71 141.1 151.4 48.6 341.1 Disbursements 1970/71 137.8 126.3 27.1 291.2 Pipeline 31/3 1971 46.0 32.7 29.2 107.9 Commitments 1971/72 160.0 160.0 50.0 370.0 Disbursements 1971/72 160.0 160.0 50.0 370.0 Pipeline 31/3 1972 46.0 32.7 29.2 49.3 - 10 - CHAPTER 2 DEVELOPMENT PERSPECTIVE: PRIVATE INVESTMENT IN THE MEDIUM-TERM Introduction 22. Development and investment activities have clearly accelerated in the past few years. Central Bureau of Statistics estimates indicate that during the period 1960 to 1966 gross investment expenditures were on the average less than 9 percent of GNP and exceeded 10 percent only in one single year. In 1967 the investment level was probably hardly above 7 percent of GNP; physical and financial evidence demonstrates that in that period exist- ing production and infrastructure facilities and existing production capacity in many sectors were not maintained. The estimates for 1970/71 suggest an investment level around 13 percent of GNP, higher than recorded in any pre- vious year since Independence in 1950, and a further growth of investment is likely in 1971/72. 23. This and the following chapter of this report attempt some assess- ment of the medium-term outlook for private and public investment. 24. In the private as well as the public sector this growth of invest- ment activity represents the implementation of projects which were planned during the last three years. The large volume of private investment proposals approved under the terms of the Foreign and Domestic Investment Laws is now having an impact on actual investment activity; the availability of medium- term funds under the investment credit program which draws upon program aid has particularly facilitated domestic private investment. 25. The growth of private as well as public investment is clearly re- flected in the balance of payments; imports of materials and equipment for investment purposes (including cosntruction materials) are estimated to have increased by about 48 percent in 1970/71 over the previous year. Imports represent approximately 50 percent of total fixed investment expenditures. 26. Actual private investment expenditure is still substantially below the level of the aggregate value of investments approved under the Investment Laws, but is increasing. Only a few of the projects undertaken have reached completion and gone into production. The effect on economic growth therefore remains limited thus far largely to the income generated by the investment process itself. It is not possible, in this report, to project the magnitude of the aggregate future growth of output and income that may be generated by investments now in process or expected to be undertaken in the near future. However, for some sectors it is possible to estimate the order of magnitude of investment expenditure over the next three to five years. For a major part of private investments this can be done on the basis of approved projects and their known or estimated work schedules. These estimates presented here are by nature tentative and subject to significant revision. - 11 - Private, Investment: 27. Since. the enactment of the two investment laws, applying respec- tively to foreign and domestic private capital, substantial numbers of investment proposals involving large estimated investment expenditure have been submitted and approved. It is known that in some cases the total pro- jected investment will be made only over very long-term periods. In some cases the projected investment is probably overstated and in others under- estimated. Nevertheless, the amounts indicated in the investment applica- tions appear to provide a reasonable estimate of aggregate private invest- ment commitments outside the petroleum sector. Although there are some cases where the projects will not be executed, these appear to be only a small number. In addition to the investments governed by the investment laws, there are large expenditures for oil exploration and, increasingly, for exploitation of new discoveries. Forecasts in this area are more difficult. 28. In the following paragraphs some estimates are presented of expec- ted near term future private investment levels. The estimates are based on approvals through the end of 1970 and disbursements known to have been made in the past few years. For a number of the large undertakings specific data on planned expenditures has been obtained; for the majority of smaller enter- prises a more generalized approach has been used., It is a major handicap that at present complete data regarding actual expenditures and plans for investments under the Domestic Investment Law are not systematically col- lected and recorded, but cross-checking with disbursements under the medium- term investment credit program and capital investment imports rate made some estimates possible. Improvements in the flow of information can be expected in the near future. Private Investment Perspectives: 29. The medium-term projections of private domestic and foreign invest- ments presented here are based on the assumption of a gradually improving investment climate, institutional arrangements and procedures, as well as infrastructure improvements. 30. The following paragraphs give sectoral levels of private invest- ment programs as specified in the contracts approved in 1967-70 and on the basis of estimated approvals after 1970. As pointed out above these esti- mates must be regarded as general orders of magnitude especially beyond 1972, The statistical base of the projections is detailed in Appendix Table 10.2 which shows sectoral trends in both approvals and disbursements. It must be pointed out that this table records investment expenditures only to the extent that they are registered through the mechanism of Letters of Credit, registration of foreign exchange purchases, and receipts issued for the purpose of obtaining tax concessions. It does not include any allowance for unrecorded or temporary imports, nor for goods or services paid for abroad. An independent calculation of these excluded items, the bulk of which is in mining investments, is made here to reflect a fuller picture of investment levels in the private sector. The table below summarizes these levels. - 12 - Table 9: Private Domestic and Foreign Investments 1968 1969 1970 1971 1975 actual actual actual estimate projection Investment Proposal Approvals under the a) Foreign Investment Law ($ million) 237.6 672.7 243.3 305.0 380.0 b) Domestic Investment Law (Rp. billion) 1.5 47.4 104.0 118.0 140.0 Investment Expenditure under the a) Foreign Investment Law ($ million) 17.5 46.4 95.6 192.0/a 285.D/a b) Domestic Investment Law (Rp billion) ... 11.3 18.6 34.0 130.0 /a Includes estimate of non-registered investment inflow. SECTORAL PROJECTIONS: PRIVATE FOREIGN INVESTMENT A. Agriculture: Food and Other Crops 31. Private foreign investment projects in this sector can be classi- fied broadly as rehabilitation projects on returned estates generally export- oriented, specialized crop (e.g. maize and spices) development projects, and expansion of existing rubber plantations. The average project in this cate- gory has a relatively long gestation period, and investment expenditure may be spread over a number of years. 32. As'of December 1970-a total of 43 projects including 28 involving returned enterprises had been approved with an investment program totalling US$75.5 million, of which US$2.3 million had actually been disbursed. Due to the nature of these projects and the apparently limited attractiveness of this field to new investors only a marginal incremental growth in total in- vestment approvals over the next five years is assumed at the level of about US$2 million per project for a total amount over ten years of US$87 million. 33. More than 50% of the actual expenditures to date have been in 1970, leaving a large pipeline of US$73.2 million. On the basis of known construc- tion work and import licenses issued, expenditures in 1971 and 1972 are esti- - 13 - mated at US$3.3 million and US$5.5 million respectively as compared with the 1970 figure of US$1.4 million. Expenditures for later years are forecast to keep accelerating to 1973 and then slowly taper off in 1974 and 1975. This assumes that no expansion projects are applied for and approved in those years, which is appropriate at the present time. B. Forestry 34. Of a total intended private foreign capital investment of US$1.3 billion approved to date, more than a third or US$340.0 million is in forestry. Included is a single integrated forest industry project involv- ing projected investment of US$235.0 million over a period of 15-20 years; the figure in this case is inflated relative to others bacause it does include project investment over a long future period, much of it out of the reinvestment of anticipated earnings. 35. Applications for forest area concessions continue to be made and 4 to 5 million hectares are currently being negotiated. According to the forest authorities half of these areas are likely to be leased out in the period 1971-73; they will involve estimated investment over time totalling approximately US$69 million. This figure is net of re-invested earnings and depreciation allowances which are also included in the intended capital in- vestment provision of the forest contracts. For 1974-75 it is assumed that new approvals involving US$25.0 million per year will occur. Actual invest- ment expenditure is assumed likely to follow the trend line of the past four years and to accelerate rapidly to 1973, and then level off thereafter. The acceleration of investment expenditure projected in the 1971 to 1973 period is based largely on known expansion programs of the seven largest firms from France, Japan, Korea, Malaysia, Philippines and Singapore. These programs include sawmilling and small-scale harbor facilities as provided for in the contracts. A factor which might lead to the acceleration of investment expenditure after 1973 is the contract provision obligating concessioners to conduct feasibility studies of wood processing at the end of the fifth year of operation. The calculation of investment levels is presented in the following table: Table 10: Projection of Forestry Investments (in millions of US dollars) Actual Projections 1967 1968 1969 1970 1971 1972 1973 1974 1975 Forestry projects approved 7.0 75.6 275.0 32.3 25.0 25.0 25.0 25.0 25.0 Expenditures on approved projects 0.7 2.9 10.9 28.8 31.0. 33.0 35.0 35.0 35.0 Undisbursed approvals 6.3 79.0 343.1 346.6 340.6 332.6 322.6 312.6 302.6 - 14 - C. Fishery 36. Fishery operations involving shore-based facilities have not to date proven to be very attractive to foreign investors, although a consider- able amount of fishing by foreign vessels is going on in the seas adjacent to Indonesia. Indonesian waters are rich in highly exportable shipjack tuna, shrimps and other crustaceans. Only a small proportion of the known poten- tial in these export products is being caught and shipped overseas from Indonesia and foreign exchange receipts from marine exports are negligible. The domestic market is not very promising as fish catch outlet, since there are considerable obstacles arising from poor interisland transport, inade- quate storage and freezing as well as salting/drying facilities. 37. To overcome these bottlenecks would require investment of consid- erable amounts of capital spread over many years. Although it is a stated policy of the Directorate of Fishery to encourage entry of foreign capital into the sector, only 9 foreign-financed projects have so far been approved, with 2-3 more scheduled for approval in the next year or two. 38. These approved projects have an aggregate intended capital invest- ment of $11.6 million, representing less than one percent of total approvals under The Foreign Investment Law. Actual expenditure, mainly on imports of fishing gear, fish finders, and other specialized equipment amounted to $7.3 million or 63 percent of total proposed capital investment in the sector. In view of the problems facing the sector, future projects are likely to be small-scale and of short gestation and the level of approved investment in 1971-75 would probably not much exceed the 1967-70 level. It is therefore estimated that total disbursements for -five years would amount to $12.0 million including the pipeline on 1967-70 projects of $4.3 million. Mining and Quarrying 39. Official estimates of approvals and disbursements in this sector cover only those projects that have been registered under the 1967 Foreign Investment Law and exclude investment data on 38 oil companies that are in various phases of exploration, exploitation and production under production- sharing contracts. In addition, two oil-producing companies under so-called "contracts of work" with the state mining company P.N. Pertamina, are not required to report their investment programs to the Foreign Investment Board. Moreover, since many of these companies finance a majority of their invest- ment imports requirements from abroad, most of these imports enter the country unrecorded. Thus the figures given in the Statistical Appendix Table 10.2 grossly under understate the real levels of private foreign investment. Tak- ing all ,these excluded items into account, the difference in aggregate levels is substantial as the table below indicates: - 15 - Table 11: Private Foreign Investment in November, 1967-1970 (in millions of US dollars) 1967 1968 1969 1970 Total 1. Approvals/Agreements: a) Hard minerals (For. Inv. Law) 76.5 82.0 304.7 0.3 463.5 b) Oil - production sharing 2.5 5.9 21.0 38.0 67.4 c) Oil - contract of work n.a. n.a. n.a. n.a. 60./a Total 79.0 87.9 325.7 38.3 590.9 2. Disbursements: a) Hard minerals - registered /a - 0.9 3.2 7.7 11.8 b) Hard minerals - non-registered-- - 0.6 2.0 40.4 43.0 c) Oil - production sharing 0.8 2.8 9.4 21.6 34.6 d) Oil - contract of work 15.3 21.3 28.7 34.0 99.3 Total 16.1 25.6 43.3 103.7 188.7 /a Mission's estimates 40. The official figures recorded on mining, which cover only mining of hard minerals, show investment to date has been mainly in exploration activities. In fact large-scale investments in construction are being undertaken by one enterprise, Freeport Sulphur, on copper deposits in West Irian, and a major nickel project is reaching the advanced design stage. Of total approvals of US$463.5 million, an estimated US$55 million has al- ready been expended, in the form of preinvestment and construction expendi- tures. Expenditure could increase very rapidly within the next few years if projected investments are realized, and thus exceed the total approvals figure; the average annual contracted amount of exploration expenditure by the nine hard mineral companies is estimated only at about US$15 million for the six years ending in 1975. Table 12: Hard Mineral Mining Investment Forecast (in millions of US dollars) Total 1970L- 1971 1972 1973 1974 1975 1971-75 Estimated exploration expenditure required under contracts 7.7 10.5 12.0 14.0 14.5 15.0 66.0 Assumed project implementation expenditure 40.4 75.0 85.0 50.0 50.0 50.0 310.0 Total 48.1 85.5 97.0 64.0 64.5 65.0 376.0 /a Estimated Actuals - 16 - Oil Mining: Production-Sharing and Contracts of Work 41. A comparison of Table 11 above and Table 10.2 of the Statistical Appendix shows that actual investment taking place in the oil sector are quite substantial. For the period 1967/70, approved investments, in the oil- sector are estimated at US$127.4 million and actual disbursements at US$133.9 million indicating disbursements in excess by US$6.5 million over approved investment. This is mainly because of the Caltex oil company investments in exploration and operation for which approvals were given for an amount of US$30 million over the period- 1963-71, but up to the end of 1969 actual ex- penditures were close to US$49 million. The higher investment in Caltex fields, much of it on intensified exploration and expansion of operational facilities over the last two years, is partly offset by shortfalls in other production-sharing contracts. 42. In projecting investments in the oil sector for the next five years, it is assumed that exploration activities will proceed at least at the same pace as experienced during the previous four years. This experience suggests that exploratory surveys which include sonic surveys and sample drillings take, on the average, three years to complete. If such surveys prove to be positive, the next three years in a six-year exploration phase will be spent in inten- sified engineering and feasibility studies. This pattern is confirmed by the Directorate of Mining as also applicable to .hard mineral exploration. On this basis, the following table sets out a five year projection of invest- ment in this sector. Table 13: Projection of Private Foreign Investment Expenditure in the Oil Sector (in millions of US dollars) /a Total 1970- 1971 1972 1973 1974 1975 1971-75 Production-Sharing contracts 21.6 20.0 38.0 55.0 64.0 63.0 240.0 Contracts of Work 34.0 35.0 37.0 39.0 30.0 23.0 164.0 Total: 55.6 55.0 75.0 94.0 94.0 86.0 404.0 /a Estimated Actuals Manufacturing Sector 43. Output of the manufacturing sector has, in the past five years, grown at less than 7 percent a year as compared with the growth of mining and forestry at 25 percent and 9 percent respectively. In 1970/71 this sector could contribute an estimated 10 percent of the GDP, but this includes a sizable component of small-scale industrial operations. - 17 - 44. The Five-Year Plan (1969-74) puts primary emphasis on agricultural development and for this period assigns the industrial sector only a support- ing role. This is specifically the case with respect to industry in the public sector, for which the Plan emphasized the rehabilitation of existing production capacity, if profitability could be expected. Expansion of in- dustrial capacity and output was envisaged only for the end of the Plan. The emphasis through 1970/71 is to be on the rehabilitation and promotion of efficient industrial production, whereas in the last two years of the Plan more funds were to be allocated for expansion and development. This support- ing role is further underlined by the preferential treatment to be accorded among others, to private sector industries that are designed to complement agricultural sector development, i.e., industries that manufacture farm in- puts or process agricultural outputs. Priority is also to be given to indus- tries that produce import-substitutes, labor-intensive industries, and industries that produce intermediate goods. Industries which contribute to development in outlying regions are also given preferences during the current Plan. 45. These objectives are to be taken as indicative only, and actual developments in the recent past indicate already a larger emphasis on new industrial investment than the Plan originally contemplated. Also, the re- habilitation of existing public sector industries, although proceeding, has not as yet generated the desired improvement of manufacturing efficiency. 46. The growing confidence in the Indonesian economy was reflected in 1969 and 1970 by an influx of capital for both new and expanding manufactur- ing firms-financed from domestic as well as foreign sources. Of 335 approved foreign investments, 184 are in manufacturing industries, mainly food, beverages, tobacco, chemicals and rubber, and metal products. An estimated US$79.5 million was actually invested as compared with US$286 million ap- proved capital. These investments were made for the most part in construc- tion materials, capital equipment, and raw material imports, most of which were purchased in 1970. A number of these projects are now fully operational with many more nearing completion this year. Those in full production are medium- to large-scale in size, employing 50 and more local laborers, and operating at close to rated capacity. Particularly in the food processing industries which presently produce import substitutes and have a potential for export, industrial efficiency is quite high. In the metal products industries, especially galvanized iron sheets, small electrical appliances assembly, and electronic assembly, present output is limited by market con- straints, but in general a high rate of use of equipment and labor is achieved. As compared with the performance of public enterprises these new and expanded firms in the private sector utilize their capacity more effi- ciently and more profitably. In the long run there will be benefits from these privately-owned firms as industrial wages in the private sector are generally based at least partly on productivity; management-labor relations have on the whole been rationalized. - 18 - 47. The following projection of industrial investments in 1971-75 relates to registered capital inflows in the foreign private sector, and to the approved investment projects in the domestic private sector. The situa- tion and outlook for each of the sectors are discussed below. Food, Beverages and Tobacco Industry 48. The earliest projects approved for foreign financing are in this sector. Mostly located in the Djakarta metropolitan area, these firms pro- duce mainly for domestic consumption,'although one or two could be considered export-oriented. Investments are of the quick-yielding variety, generally small- to medium-scale, moderately capital-intensive and utilizing for the most part imported raw materials. As such, their main economic impact is in the absorption of a portion of the city's excess labor force, and in the marginal saving of foreign exchange through import substitution. While on the whole there is still excess capacity in this sector due to the limited demand for processed food and beverages, the tobacco and beer plants are operating at close to installed capacity. Despite the prospective growth of domestic demand for some of the commodities produced it is possible that this demand can be met over the next half decade by raising the rate of utiliza- tion in existing plants and adding limited new capacity. It is assumed that project disbursements over the period 1971-72 will be principally the invest- ment of already approved projects which at the end of 1970 had a pipeline of committed investment totalling US$25.0 million. A stream of slowly growing disbursements corresponding to new estimated approvals is assumed thereafter. Textile, Paper, Fertilizer, and Cement 49. As indicated in Chapter 3, a substantial proportion of these in- dustries is in the public sector. 50. The bulk of approvals of private investment in the textile in- dustry are for spinning and weaving plants using imported synthetic fibers and filaments in the first few years and manufacturing the same inputs from local materials at a later stage. This development reflects the stated policy of the Ministry of Basic and Light Industries to stimulate textile investments using synthetics, since there is a potential for a domestic petro-chemical industry. In addition, these new plants are of the integrated type or designed for eventual integration. Approvals of foreign private investments in this sector totalled US$58.6 million of which US$12.2 million was spent until the end of 1970 in plant construction and imported capital equipment. 1971 approvals so far consist of three projects all using synthe- tic inputs and having an intended capital investment of US$64.6 million. 1972-1975 approvals seem likely to be mainly for expansion projects or re- tooling investments in existing cotton-oriented plants towards equipment suited for use of synthetic-cum-cotton raw materials. 51. In Paper and Paper Products manufacturing none of the project approvals over the period 1967-70 are for pulp or paper production. All six projects approved are paper-using industries designed to produce a variety - 19 - of packaging materials such as corrugated paperboards, cardboard boxes, and cigarette packages. One is committed to do offset printing using apparently the higher-priced lower quality domestic newsprint. In view of difficulties facing the pulp and paper industry (discussed in Chapter 3), it is assumed that the increase in the total level of investment between 1971 and 1974 as compared with the investment levels in 1967-70 will be small, consisting mainly of related paper industries as noted above. Disbursements are assumed to rise from US$1.1 in 1970 to US$1.5 and US$2.5 in 1971-72 as the pipeline of already approved projects gets disbursed. Since the average size of these firms is small, disbursements are further assumed to be completed at the end of three years after approval. This makes allowance for any delays in lo- cating suitable plant sites and obtaining the required operating licenses. Chemicals, Rubber, and Plastic Products Manufacturing 52. Under this classification various industrial chemicals and chemi- cal products are grouped together, including pharmaceuticals and plastic pro- ducts, fertilizers, cement, crumb rubber, and tires for light and heavy trans- port vehicles. This category therefore covers a whole range of basic industrial products where foreign capital has been invested and continues to come forth. There are 62 of these projects approved as of the end of 1970 with an intended capital of US$66.6 million, of which almost 22 percent or US$14.6 million has been actually spent during the same period. This excludes the major public sector fertilizer and cement plants financed by project aid, with a combined total foreign exchange cost of US$77 million. 53. The industries concerned are generally medium-scale by international standards, using fairly simple capital equipment, and requiring only semi- skilled labor. The construction phase, as indicated by experience in the 1967-70 period varies from one to four years at the extreme, including delays involved in land acquisition and difficulties over licensing procedures. Over the next five years these problems should become less significant, re- ducing the pre-operational period to a maximum of three years. Pharmaceuti- cal and crumb rubber factories normally take only about a year and a half to prepare for the trial run stage under existing investment conditions. 54. A large pipeline of applications in this field not yet processed at the end of 1970 leads to an estimate of US$35 million to be spent in 1971 as compared with US$26 million in 1970, and another US$35 million for 1972, as a result of 20 or more joint and direct ventures being negotiated present- ly and expected to be approved in these years. An assumed acceleration in new approvals in 1973-74 to US$40 million and US$45 million respectively is based on several factors including the assumed development of petro-chemical production catering especially to the synthetic textile mills scheduled to operate in those years, and the forecast higher demand for better quality dye-stuff and other printing materials. - 20 - 55. In view of these developments and of the relative profitability and known domestic demand for these products, the level of actual investments and rates of growth over the next five years are substantially higher than in the previous four-year period. This projection is as follows: Table 14: Projection of Chemical, Plastics and Rubber Investments (in millions of US dollars) Total 1967-70 1971 1972 1973 1974 1975 1971-75 Approvals 66.6 35.0 35.0 40.0 45.0 45.0 200.0 Expenditures 14.6 20.0 22.0 26.0 27.0 27.0 122.0 Metal Products 56. There are 52 projects approved in this sector covering about 45 different items which range from zippers to sewing machines, motor scooters to trucks, light bulbs to electrical transformers. About the only common characteristic of these various products is that they are destined for the domestic market, except for a few specialized items such as electronic com- ponents, some air conditioners and refrigeratiors, and fully assembled radios. 57. The possibilities for further investment in this area are enhanced by the largely untapped supply of trainable and low cost manpower. It is believed that labor costs in Indonesia will at least for a number of years continue to be lower than in Taiwan, Korea, Hongkong and Singapore and this factor constitutes one of the main attractions for setting up these relative- ly low-cost investment projects which normally yield high returns quickly. 58. The average cost of these projects is estimated at US$1.25 million each, and they do not require complex investments. Total approvals of US$65.2 million have led to US$24.4 million of actual disbursements. This latter amount is over 37 percent of approvals which is relatively high on account of the short gestation period involved after sites are determined and acquired. In.the next five years this gap between expenditures and approvals is likely to be narrowed down further as land acquisition diffi- culties are reduced and utility services improved. Approvals in 1971 are assumed to proceed at about the same level as in 1970, then slowly accele- rate to 1975 when they will reach US$50.0 million. Disbursements on the other hand will be large in 1971 because a large number of projects are now in the construction stage, and this momentum will continue into 1972, maintaining an absolute level of about US425.0 million of expenditures in those years. The magnitudes are detailed in Table 10.1 of the Statistical Appendix. - 21 - 59. Projections for other industrial products which have so far at- tracted less attention are also detailed in that table. These are mainly manufactures of basic metal products, non-metallic minerals, wood products and other miscellaneous items. Other Sectors 60. -Private foreign investment in Construction has been confined prin- cipally to land and housing development, hotel construction work, and archi- tectural consulting work. Total approvals at the end of 1970 amounted to $32.7 million and disbursements, mainly in the form of wages and salaries, totalled $6.7 million. Approvals over the next five years are estimated to increase at 16% a year and disbursements are assumed to follow a correspond- ing expansion path determined by an increasing ratio of disbursements to approvals. This is due to forecasted accelerating demand for housing and hotel space that meet international standards. 61. Approvals and disbursements for new Hotels are small at $5.5 mil- lion and $0.7 million respectively. These new hotels coming under the For- eign Investment Law do not seem to include the several new large hotels cur- rently under construction and scheduled for completion in 1971-74, which have been officially estimated to have an aggregate cost of approximately $50 million. It can be assumed that much of the invested capital is from foreign private sources. For these reasons, the figures that appear in the Statistical Appendix for Hotels appear understated. To what extent they are understated may be calculated by multiplying the present plans for 7,500 additional rooms by 1974 by an average cost per room of US$20,000. This gives a more realistic figure of US$150 million as compared with the approx- imately $50 million official*estimate. 62. In Transport investments, there is likely to be no major increase in either approvals or disbursements over the next five years as compared wit the 1967-70 period. These investments are mainly ferrying services by air- planes and helicopters that have capitalized on the service needs of oil and mineral prospectors. As mining explorations are increasingly being carried out by company-owned aircraft, and as the number of major additional prospec- tors is small, demand for ferrying services may in fact begin to decline after 1973 when it is assumed that the undisbursed balance of 1967-70 ap- provals will be spent. 63. Other investments in Services include wholesale trade and distri- bution, real estate development, consulting work, and recreational facili- ties. Since these services are highly income elastic and since investment in these sectors depends on the general economic climate, it is difficult to make even a medium-term forecast. For these reasons, expenditures are assumed to be at about the same level as in the previous four years and slowly accelerating to 1975. - 22 - Private Domestic Investment Projections 64. The approach used in projecting private foreign investment in the foregoing paragraphs cannot be applied to the same extent for private domestic investments. The Domestic Investment Law (Presidential Decision Number 286, 1968) became operative only in late 1968, and data on approvals are the first collated reliable set of figures on these projects. Statistics on implemen- tation are far from satisfactory, consisting of a collection of untested, in- complete figures which can hardly be used for a projection exercise. It is understood, however, that a clearer and more reliable set of project dis- bursement data will be made available by June 1971, when teams from the Domestic Investment Board now in the field compile their reports in accord- ance with the terms of a recent Presidential decree requiring more up-to- date reporting on project implementation. Therefore, the projections at- tempted here should be regarded as highly tentative and be considered only as general orders of magnitude. 65. In the absence of complete direct evidence of actual investment expenditures in this sector, the mission examined import data relating to private domestic investment for 1969 and 1970, and by combining those with the available approval and disbursement data, determined the possible import content of investments by economic sector for these years. Assuming that the local currency expenditures were the same proportion of total actual expenditures as indicated in the investment application (this proportion varied from 19 - 25 percent on approved intended capital investment), total annual disbursements by sector were derived accordingly. Using this rough method of calculation the mission estimated a total investment expenditure of Rp 11.0 billion for 1969 and Rp 19 billion for 1970. 66. The magnitudes of expenditure for 1971 and 1972 were then calcu- lated for the same projects in each sector by subtracting estimated invest- ments made up to the end of 1970, and assuming a certain amount of expend- iture on projects that are now in the preparatory stage. This process was repeated for the later years, and the results are detailed in the Statistical Appendix Table 10.3. 67. The projected expenditures, even after allowing for varying time lags between approval and implementation, follow the same general pattern as the approvals. For example, industrial projects among the approvals in 1968-70 constitute 63.1 percent of domestic investments and in terms of ex- penditures these same projects account for 61 percent of total investment expenditure of Rp. 34.3 billion estimated for 1971. The rapid increase in investments from a level of Rp. 34 billion in 1971 to Rp. 131 billion in 1975 is due to the fact that almost 80 percent of total approved investments are for small-scale, short-gestation (one year or less) projects, about 20 percent are medium-term (one to five years), and less than one percent are long-term (five years and above). Moreover, the fact that about one-third of these approved projects are expansion-type investments and therefore do not face the delays encountered by new projects, also accounts for this rapid acceleration. - 23 - 68. The levels of investment projected above indicate growth of private investment, foreign and domestic together, between 1971 and 1975 at a rate of about 17 percent per year (see Table 15), or from approximately $358 mil- lion in 1971 to $679 million in 1975. Foreign private investment expenditure, which was already fairly large in 1970, especially in mining and petroleum, is projected to grow at a lower rate, 7.5 percent, or from $230 million in 1970 to $331 million in 1975. Domestic private investment is, however, pro- jected to grow more rapidly, from $50 million in 1970 to $348 million in 1975, when it, according to these projections, will exceed foreign private investment. In sectoral terms, investment in manufacturing is projected to grow very rapidly and to represent somewhat over half of total private in- vestment outlays in 1975. As. is evident from the description of projection methodology above these projections must be regarded as very tentative. 69. This projected growth of investments under promotion arrangements in the private sector would be about equal to the projection of public in- vestment growth as presented in Chapter 3. It would be realistic to expect other investment expenditures, i.e. outside the public sector development program and the area of promoted private investment, to grow more slowly as this remainder consists partly though not entirely of fixed assets forma- tion in the unorganized sector. The investment projections made more glob- ally in Chapter 4 do indeed indicate a rate of growth of total investment expenditures which is somewhat less, at 13-14 percent, which reconciles well with the projections of private promoted investment described above. Table 15: GROWTH OF PRIVATE INVESTMENT BY MAJOR ECONOMIC SECTORS ($ million) (%) 1970 1971 1975 Average annual Est. Actuals Estimates Projection rate of growth 1971-75 Agriculture, Forestry, Fisheries 42.3 56.0 126.6 22.0 domestic 8.0 18.7 85.8 foreign 34.3 37.3 40.8 Mining, quarrying 142.7 142.5 153.6 1.9 domestic 0.7 2.0 2.6 foreign 142.0 140.5 151.0 Manufacturing 73.7 132.6 348.5 27.0 domestic 28.2 55.6 238.1 foreign 44.5 77.0 110.4 Other sectors 21.3 26.8 49.8 16.8 domestic 13.1 14.6 21.2 foreign 8.2 12.2 28.6 Total 280.0 357.9 678.5 17.3 domestic 50.0 90.9 347.7 foreign 230.0 267.0 330.8 - 24 - CHAPTER 3 PUBLIC SECTOR PROGRAMS 70. In accordance with the Presidential decree governing the First Five-Year development Plan, 1969/70 - 1973/74 1/ the public sector dev- elopment program and and- the policies for economic growth as a whole are being implemented in a series of annual programs, each within the general framework of the Plan but reflecting also the knowledge and experience accumulated since the formulation of the basic Plan document and the actual circumstances of each year. The development budgets of 1969/70, 1970/71 and now for 1971/72 also indicate changes in the resource pattern envisaged in the Plan, particularly in relation to project aid which was disbursed less rapidly than was originally envisaged. The trends in public sector development operations, present and future, can thus be more readily deter- mined by reference to the annual programs than to the 5-year Plan. Resources for the Development Budget 71. The size of the annual development programs is determined by the level of disbursements of project aid, the availability of counter- part funds and the degree to which routine budget expenditures can be held below domestic revenues as both expand. The surplus of routine rev- enues over expenditures represents the Government's contribution of domes- tic resources to the national development effort. As recently as 1968, no surplus over routine expenditures could be obtained and the small develop- ment program was wholly financed with external resources. In the first year of the Plan, 1969/70, a surplus of Rp 27 billion (US$88 million) was generated. This should increase to Rp 34 billion in 1970/71, supplying 23 percent of development program resources. The State budget for 1971/72 projects a surplus of Rp 52 billion. 72. Internal government revenues can be expected to continue to in- crease, although not as rapidly as in the past several years. Revenues from the payment of corporate tax by the oil enterprise sector are expected to grow at a more than average rate. It is estimated that the average in- crease'-in internal revenues over period of 1971/72 to 1974/75 would be in the order of 15 percent per year. At their 1971/72 level of Rp 344 billion internal revenues amount to approximately 10 percent of estimated gross national product; if the average annual increase in GNP for the four- year period would be approximately 6 percent, then an average increase of 15 percent in internal revenues would raise their share to approximately 13-14 percent of GNP in 1975/76. This appears to be the maximum that can be obtained without adverse effects on the growth of savings and investment in the enterprise sector. 1/ No. 319 of 30 December 1968, Articles 2 and 3. - 25 - 73. -It is difficult to estimate the required growth of routine budget expenditure. On the one hand, the routine budget expenditures at present do not provide adequately for maintenance of existing facilities or for future facilities now being established in the highways and irrigation sec- tors and in the field of, for example, health and education. These provi- sions are neither adequate in quantity or quality. The routine budget must also provide for the current costs of development projects being com- pleted at present and these allocations need to be properly integrated with the progress of the development budget. On the other hand, there is little doubt that the work performed and services provided through routine budget allocations are inadequate and that civil as well as military agencies are seriously overstaffed. In addition, the entire structure of salaries and remunerations is irrational and needs to be completely overhauled. This task is now beginning to be taken in hand. For the purpose of the projec- tions presented here it is assumed that in the period 1970/71 to 1974/75 routine expenditures would increase at an average annual rate of 9-10 per- cent. 74. Table 16 shows actual revenues in 1970/71, the budget proposal for 1971/72 and budget proposal projections of revenues and expenditures through 1974/75. This indicates that the routine budget surplus may be tripling over those years from an actual Rp 34 billion in 1970/71 to about Rp 110 billion in 1974/75; taking this surplus as repres-enting government savings, the marginal rate of those savings would range between 30-35 percent in the period. External Resources 75.. Specific project commitments in the I.G.G.I. framework are expected. to amount to approximately US$400 million by 1970/71 and most, if not all, will be disbursed within the period through 1973/74. A further US$75-80 million of pre-1967 aid will also be disbursed during this period. In addition, the 1971/72 project list presented to the I.G.G.I. contains proj- ects (including C category projects still subject to feasibility study) with a foreign exchange and other aid component of almost US$500 million. Many of the projects in this list will also obtain commitments which will disburse at least partly during the Plan period. Table 16 presents an es- timate of the disbursement pattern following from commitments already made and from assumed.new-specific commitments of US$275-300 million in each year to 1974/75. 76. A figure of Rp 90 billion is assumed for counterpart generation in each year from 1971/72. The actual level will depend on the amount of program aid Indonesia receives in future years, in each category, and this in turn will depend on'a number of factors, some of which, such as domestic foodgrains production or export price levels, are subject to short-term variations. It will also depend on the relationship between commodity aid valuations and domestic prices for those commodities. Counterpart genera- tion can be maximized only within a domestic price constraint, with aid Table7l6: Projected Revenues and Expenditures, 1968-1974/75 (in billions of rupiahs) 1968 1969/70 1970/71 1971/72 1972/73 1973/74 1974/75 actual actual estimate estimate proJected projected projected Routine revenues 150 244 344 416 470 525 590 Routine expenditures 150 217 310 364 400 435 480 Routine surplus - 27 34 52 70 90 110 Counterpart funds 36 69 73 90 90 90 90 Project aid disbursements 7 23 28 53 72 88 105 Total external resources 431 162 178 Total development budget -. 111 195 2 268 220. External aid as % of total (100) (77) (75) (73) (70) (66) (64) a Total rupiah resources 26 26 107 14 160 180 200 Increase in: Revenues 21 13 12 12 Expenditures 17 10 9 10 Surplus 53 35 29 22 Development budget (Rp.) % 33 13 12 11 Development budget(total)% 44 19 16 14 a/ Estimated. - 26 - valuations establishing debt obligations (except for grant aid) and not real benefits for the budget. This level of counterpart budgetary support would be consistent with a pattern of resource growth in which the share of domestic resources will continue, as it has done in the last two years, to increase. As shown in the.table,.on_this formulation the proportion of domestic resources in total development expenditure would increase each year from 23 percent in 1969/70 to 33 percent in 1973/74 with a further increase in the following year. If larger surpluses can be secured, the level of counterpart funds could rise without affecting this trend. 77. Table 17 compares the resource projections of the mission with those in the First Five-Year Plan, adjusted to 1970/71 prices for all years. The projections of public savings (Government domestic revenues less routine expenditures) correspond quite closely for individual years and, in total, almost coincide. The estimates of counterpart generation, which are subject in both cases to wide margins of error, are not dis- similar. The major difference is in projections of project aid disburse- ments. Our figures are in each year around half those in the Plan and., although rising in the same way, amount in total to only 50 percent of the Plan projection. 78. The net effect is that the mission estimate of combined resources, Rp 1,026 billion or about US$2,700 million, is lower'by about 18 percent than the Plan figure, a shortfall caused mainly by a slower build-up of project aid disbursements than was envisaged by the architects of the Plan. This has happened for several reasons: the difficulties of project iden- tification and projection in the initial stages of rehabilitation; the unfamiliarity of both recipient and aid-givers with each others' procedures and requirements; organizational problems in some agencies of the Govern- ment; and some delays on the part of aid givers; all contributed to initially low annual totals, for specific commitments, especially in 1968. Implementation problems have slowed disbursements from commitments already made. These have now in many cases been overcome, but the combination of slow project commitment and disbursement rates as the development program gathered momentum has established a time-lag which will not be made up for several years. - 27 - Table 17: Resources for the Five-Year Plan (in billions of rupiahs at 1970/71 prices) Plan Projections 1969/70 1970/71 1971/72 1972/73 1973/74 Total Budget surplus 26 39 51 65 84 265 Counterpart 68 89 101 101 101 460 Project aid 39 53 113 147 166 518 Total 133 181 265 313 351 1,243 /a Mission Projections- Budget surplus 24 34 52 70 90 270 Counterpart 66 73 103 110 115 467 Project Aid 21 42 66 72 88 289 Total 111 149 221 252 293 1,026 /a Actuals for 1969/70, estimated actual for 1970/71. Development Expenditures 79. The probable pattern of-public sector development expenditures through 1974/75 emerges quite clearly when the broad resource projections are related to policies and programs already being implemented and commit- ments of project aid already made or requested. The fact that most aided projects are multi-year projects determines, to an increasing extent, the uses to be made of rupiah resources. Each specific project aid commitment establishes a set of expenditures in both foreign and local currency, at rates and in proportions depending on the character of the project. Unless project implementation is to be delayed by shortages of rupiah funds, a situation which has occurred in the past and which the present Government is determined not to allow again, disbursements of project aid must be matched by appropriate and timely expenditures within the rupiah develop- ment budget. 80. Table 18 shows the distribution of project aid by sectors, both for I.G.G.I. commitments to date and for projects in the 1971/72 list. In both past commitments and the new requests power, transport and tele- communications comprise about 50 percent of the total. Economic and social infrastructure programs altogether amount to about two-thirds of the total. The main difference between the two lists is that some infrastructure sec- tors, especially agriculture and health are somewhat more adequately re- presented in the 1971/72 list than in the commitments already obtained. The failure of these sectors and of education to secure more than nominal commitments so far is in part indicative of difficulties in project prepara- - 27a - Table 18: Project Aid Distribution by Sector, 1968-1971/72 IGGI Commitments 1968-1970/71 1971/72 List .5 million _ million - Central Government Programs a. Economic 257.0 (62) 311.1 (62) Aiculture 4.7 19.0 Irrigation 62.8 32.9 Power 82.2 104.1 Trans-port 72.2 136.2 Telecomminications 35.1 11.9 Tourism - 7.0 b. Social 13.1 ( 3) 25.8 ( 5) Water Supply 7.7 9.8 Health & Pamily Planning 0.6 11.0 Education 4.8 5.0 Production Sectors 143A (35) 161.0 (32) Agriculture 48.9 75.4 Industry & lining 94.7 52.6 Sea Transport - 33.0 Total 413.7 497.9 a/ Excludes UNICEF supplies for health.and education programs, anj the FUND!I program. - 28 - tion which are now beginning to be overcome. In part also, the imbalance in allocations between the economic and social sector results from a neces- sary emphasis on physical rehabilitation projects which would produce ear- lier economic benefits. More attention can now be given to high priority social sector projects, but it could be several years before they are receiving an appropriate proportion of total external aid. 81. Although most project aid has been given, and is being requested, for the rehabilitation and expansion of the economic infrastructure, commit- ments amounting to one-third of the total have been made to production en- terprises in the public sector. Agricultural estates (US$37.4 million) and the Pusri fertilizer project (US$68 million) have been the main benefi- ciaries. The proportion is maintained in the 1971/72 list, with more emphasis on lending through Indonesian development finance institutions for both public and private enterprises in the industrial and transport sectors. The bulk of project aid is more directly related to central government departmental expenditures. 82. The proportion of local costs varies with each project, from about 25 percent for new highway construction and some communications projects to 75 percent or more in those sectors in which personnel and local material costs make up a large proportion of the total. For projects in the 1971/72*.-ist the average is about 42 percent with power and tele- communications projects having a relatively high foreign exchange component, an average for all transport sectors of around 50 percent and proportionately higher local costs for irrigation, water supply and social sector projects. Allowing for maintenance of completed projects, it would be unwise to assume less than an average 1:1 ratio between project aid disbursements for infrastructure projects and associated local costs until more specific information is available. 83. 'The rupiah resources not tied to project aid are available for other priority uses. Regional development programs, for West Irian and for district and local development, will account for about 12 percent of rupiah expenditures in 1971/72 and, in view particularly of the favorable response to the district (Kabupaten) Program and its contribution to in- frastructure rehabilitation, this proportion appears likely to be maintained or increased. The West Irian program is supplemented by the FUNDWI opera- tions described in earlier rep.orts, which could involve capital.and tech- nical aid of up to US$35 million during 1969-74. The budget also provides credit through the banking system mainly to public enterprises. The rest of the funds are allocated to departments for approximately 2,000 projects, many very small, submitted each year for budget approval. 84. Table 19 indicates in broad outline the developmental programs which could result from the continuation of established trends over the period to 1974/75. Table 19: Development Program by Sectors, 1969/70 to 1973/74 and 1974/75 (in millions of dollars) 1969/70 to 1973/74 1974/75 Project Associated National Project Rupiah Aid Local Costs Programs Total Aid Budget Total Central Government Infra- structure Programs 500 500 950 1,950 200 375 575 Economic 450 400 550 1,40 180 240 -420 Power 175 7 5- 300 Transportation 150 150 150 450 Telecommunication 40 20 20 80 Irrigation 70 140 140 350 Other- 15 15 190 230 Social 50 100 250 400 20 100 120 General - - 150 150 - 35 35 Regional Programs - - 225 225 - 75 75 Aid to Production Sectors t 200 100 50 350 100 50 150 Total 700 600 1,225 2,525 300 500 800 a/ Agriculture, industry, mining and transport enterprises. Project aid as % of total: 28 38 External as % of total: 70 64 - 29 - 85. The total five-year program of about US$2,500 million would be small in relation to the needs and would amount only to 5-6 percent of the cumulative GNP over the period. It would nevertheless represent a major effort to,marshall resources for projects in the public sector. Project aid would supply less than 30 percent of total resources, but the proportion would increase each year and approach 40 percent in 1974/75 as disbursements reach some US$300 million a year. The local costs asso- ciated with aid projects would also grow more rapidly than total annual expenditures. Total expenditures on aided projects could exceed half of all development spending. There are, however, a number of programs which, as described above, are being financed purely with domestic resources and cannot readily be financed by project aid. Thus even with rising aid inflows the pressures on rupiah resources would continue to exist. 86. This indicates that care in project selection, especially in new areas or for major projects, needs to be exercised to husband scarce bud- getary resources. It implies also that the dependency of public sector enterprises on support through the government budget should be reduced, notably in those activities where private enterprise performs equally or more efficiently. Public enterprises should either be transferred to private management or required to be financially independent. A number of actions have been and are being undertaken already, as in the case of the state corporations for electricity and telecommunications, to improve efficiency in enterprises which will remain in the public sector. Eforts are also being made in other sectors like irrigation to transfer at least part of operation and maintenance costs to the beneficiaries of such facil- ities. Such actions will result in the release of budgetary resources for other programs and projects. 87. The required local currency resources for the development budget can only be obtained if the increase in routine budget expenditures is kept lower than that of recent years. This will require that public sec- tor resources in the routine budget are used efficiently to provide essen- tial government administration and services at the lowest possible cost. 88. There is also a need for improved design appraisal and evaluation of development projects in the departmental budgets. Also in this area actions have been or are being taken to improve methods of project prepara- tion and appraisal, and simultaneously further steps are -taken which sub- stantially improve present methods of evaluation and progress reporting. 89. The following sections describe the development of the public investment programs for the main sectors, the role of project aid and, to the extent now possible, the developments likely to occur through 1975. More comprehensive information on the present position in most sectors is contained in Volume III of the last Bank economic report. - 30 - Agriculture and Irrigation 90. The development of the agriculture sector is crucial to the growth of the economy and to the maintenance of a viable balance of pay- ments. At present, agriculture contributes about half of the national product and income and more than 70 percent of total employment; although these shares will decline over time, it will be years before the growth performance of agriculture ceases to be the major determinant of general economic development. 91. The agricultural sector is different from most other sectors of the economy in the sense that the growth of output depends not so much on new investment alone as on an interplay between several types of recur- rent and investment expenditures. Although investments in the rehabilita- tion and extension of irrigation works, feeder roads, storage, research and training facilities and agricultural tools and equipment are a major part of any agricultural development program, the supply and distribution of seeds, fertilizers and pesticides, extension services and credit need to be integrated with the investment program. Studies undertaken for the future development of the agricultural sector are therefore partly in the nature of pre-investment studies, but must also consider the required level and arrangements for distribution of current inputs and the market- ing of products. While all these studies are a Government responsibility, the financial implications extend beyond the budget to the use of private resources and the credit facilities of the.banking system. 92. Rice being the staple diet, the major crop and the largest com- ponent of food imports, several of the current studies are related to programs and projects aiming at increased rice production, in line with the Plan target of food self-sufficiency by 1975. The studies concern the rehabilitation of irrigation works, fertilizer production and dis- tribution, the development of groundwater, seeds production and distribu- tion and rice milling, marketing and storage. In addition, an evaluation of past and present schemes for intensification of rice production now being made should lead to recommendations for the future organization of such programs. 93. Irrigation: A first IDA credit for irrigation rehabilitation in October 1968 provided for a series of feasibility studies to determine needs for futher rehabilitation of technical irrigation areas and their order of priority. These studies have assessed the feasibility of irri- gation rehabilitation projects in an area of about 600,000 hectares; in addition the rehabilitation of the Djatiluhur irrigation area which com- prises 180,000 hectares of irrigable land was appraised. These studies have now covered all areas where rehabilitation projects suitable for external financing can be quickly identified. Loans have been obtained for works covering about 600,000 hectares and in the course of the next fiscal year additional aid for further projects, covering more than 200,000 hec- tares, is expected. The total area covered would correspond closely to the - 31 - target for irrigation rehabilitation of 850,000 hectares set in the Five- Year Plan. By the end of the Plan in 1973/74, however, only limited areas may be served by improved irrigation because the average time for the completion of thes.e projects is sually four to five years. Delays in actual implementation could extend the gestation period, and completion of improved facilities in the area of 800,000 hectares to be undertaken during the current Plan period might then fall within the latter part of the Second Five-Year Plan period. 94. Investment expenditures for irrigation rehabilitation range around $130 per hectare; if each year a new project covering 200,000 hec- tares is undertaken and the average time for completion is five years, this would involve annual expenditures in the order of $26 million or Rp 10 billion. The budget for 1972/72 reflects this with an allocation of Rp 9 billion in local currency, and the equivalent of Rp 2.6 billion of expected project aid and technical assistance disbursements. Both figures may over- state actual rehabilitation activity because the projects included in the departmental program also include an element of new works and because dis- bursements of project aid may not reach this level. 95. It is estimated that small and scattered irrigation areas, com- prising some 1.0 million hectares, are in need of rehabilitation as well, but no studies have so far been undertaken to assess their costs and phasing or the best way of organizing the rehabilitation work. For the time being it appears that the magnitude of rehabilitation works presently ongoing and to be undertaken in the next few years requires the full use of available staff and existing organizations for this program. 96. Outside the rehabilitation effort, most of the budget for irri- gation is used for the completion of projects started in earlier years, and for explorations, emergency control measures and equipment rehabilita- tion. Some of the large extension programs in Java and South Kalimantan, financed by Japanese aid, are to be completed in two to three years' time; many of the small and scattered projects which presently cause a drain on scarce technical manpower, should be assigned priorities, so that some would be temporarily halted and other implemented more rapidly with the extra resources made available. The technical assistance list for 1971/72 includes a request for engineering and design assistance to speed completion of appropriate projects. 97. The size of investment needs for new irrigation works is not known at present. Regional studies, like the one proposed for 1971/72 in the Lampung area, South Sumatra, may identify economically attractive irri- gation extension projects. The exploration of groundwater resources has hardly begun but in some promising areas a program of pilot projects has been recommended on the basis of preliminary investigations. One of those areas may be included in an irrigation rehabilitation project presently being prepared. New studies are required on swamp land reclamation and coastal irrigation in connection with the preparation of new settlement - 32 - programs. Substantial investments for the development of new large-scale irrigation systems cannot be expected to occur within the next three to four years until such studies are completed. The size of the public sec- tor irrigation program could therefore remain at about present levels, to increase at a later stage when new projects reach the stage of implementa- tion. 98. Other Crops: The dominance of the rice program is indicated by the relatively small attention, in the form of studies and surveys, which has been given to other crops outside the estate sector. A project preparation study was made in 1969 for maize cultivation on new lands in South Sumatra and a project is being implemented which will, by 1975, com- prise an area of 4,000 hectares. A feeder road study for the same area has recently been completed.. 99. In late 1968 the results of a survey of selected export agricul- tural commodities was submitted to the Government, addressed largely to the establishment of priorities for processing industries of smallholder export crops. The survey covers rubber, coffee, tea, copra, sugar, spices and essential oils, but recommendations are of a general nature only and a number of more specific studies is suggested. For some of these the Government has requested technical assistance in the aid request for 1971/ 72; studies on sugar and copra are expected to be completed by the middle of 1972, whereas a study on smallholder rubber is scheduled for completion before the middle of 1971. The latter is addressed only to one particular region of smallholder rubber cultivation in North Sumatra. 100. Estates Rehabilitation: Since the first project for estate rehabilitation was prepared in 1968/69, a number of project studies have been completed or are in train for the rehabilitation of Government-owned estates. It is expected that projects for most estates which still can promise good returns on the costs of rehabilitation will be committed in the next year or so. 101. Livestock: In August 1969 a project identification mission concluded that livestock development prospects were promising in the Eastern Islands (Bali, Lombok, Timor) and a detailed study is now being made to formulate a project. Technical assistance has been requested for studies of livestock development around main consuming centers. Im- proved slaughterhouse facilities-are under negotiation for Djakarta and Surabaja. 102. Fisheries: No comprehensive studies of the fisheries sector have been made or initiated. There is a large potential for marine fishinj in the Indonesian seas which has only partly been tapped, but development is constrained by shore and marketing facilities which are at present in- adequate or non-existent. The IDA project in Aer Tembaga (North Sulawesi) is a first attempt to establish such facilities and to improve the quality of the-fleet and its equipment. The sector could be supplying additional - 33 - protein in the national diet, and also has considerable export possibilities, notably for tuna and shrimp. The Government has requested technical assistance to help determine the possibilities of increasing shrimp cul- tivation. Projects for.skipjack and shrimp fisheries along the lines of the Aer Tembaga scheme are proposed for financing in 1971/72, in seven more locations throughout the archipelago. 103. Investment: The irrigation program described in paras. 93 to 97 will absorb about 10 percent of all project aid disbursements during 1969-74 and about 15 percent of aid for infrastructure rehabilitation. The aided projects have relatively high local costs, only part of which can be met from the element of local currency financing possible with some IDA credits. In addition, there are small-scale rehabilitation works covering perhaps one million hectares, and a number of small new projects, which are entirely rupiah-financed. The equivalent of $56 million in rupiah funds is budgeted for the 1971/72 program and total expenditures in 1969-74 would approach $350 million, including perhaps $70 million in aid disbursements. 104. Most aid for other agricultural projects is being directed to public enterprises, especially rubber and palm oil estates producing for export. The foreign aid component of departmental programs has been minimal and the allocation of resources is therefore substantially unaf- fected by project aid. Industry and Mining 105. The policy of the previous Government of establishing new indus- tries mainly in the public sector, and the nationalization over the same period of major industrial and mining enterprises formerly under private foreign ownership, have resulted in a large degree of public control in these sectors. 106. In mining, foreign interest in hard minerals extraction has led to the substantial investments described in Chapter 2, but all present production is under the control of two state enterprises, PN Timah and PN Aneka Tembang. Nearly 90 percent of Indonesia's crude oil is produced by foreign oil companies under "contracts of work" and, for new companies, production-sharing arrangements, but the state oil enterprise PN Pertamina is responsible to the Government for all production and refining. The investment programs of these state enterprises are carried out mainly from own earnings supplemented, in the case of Pertamina, by extensive foreign borrowing on its own account. None contributes significantly to the routine budget from operating profits. None receives support from the development budget. PN Timah has been the recipient of project aid for the rehabilita- tion of tin dredgers and a power plant but finances rupiash costs from its own cash flow. - 34 - 107. The situation in the state industrial sector is more complex. In several industries, notably sugar, fertilizer, cement, soda oxygen, paper and spinning (where 80 percent of capacity is Government-owned), state enterprises dominate production; in some such as salt, rubber, matches, other textiles and metal working they make an important contrib- ution to total production. While their share of industrial employment or value added probably does not exceed 15 percent of the total, they include some of the largest and most capital-intensive plants in the present in- dustrial structure. With some notable exceptions, the sector is charac- terized by technological obsolescence, inefficient scale and managerial and financial problems. Its contribution to the budget is probably negative, with profits made by some firms more than offset by the losses of others. Subsidy benefits accrue mainly to this group-of industries, and their needs for credit are large and continuing. The Government has arranged or re- quested a number of industry and project feasibility studies to help in planning and policy-making for greater efficiency and output, but no general examination of the state enterprise activities and their costs and benefits to the economy has yet been made. 108. It is clear, however, that there is little scope for inefficient industrial operations or, particularly, for a drain on scarce budgetary resources to finance them. Under the new economic policies introduced since 1966 the role of market forces has been emphasized, and the criterion of market efficiency for public as well as private enterprise is now becom- ing established. Several state enterprises have been transformed from P.N.'s (perusahaan negara) to P.T.'s (perseroan terbatas), the main dis- tinction being the independence of enterprise management from the responsible ministries or departments. Recently requests for this change in status have been made for 25 of the 27 enterprises under the Ministry of Industries. Plans for the transformation and possible integration of three main metal working and machinery plants are in an advanced stage. 109. Project aid made available to several major public sectors, in- dustrial enterprises, mainly for fertilizer, cement, paper and caustic soda production, for metal foundries and agricultural equipment manufactur- ing, should make a significant contribution over the next few years to the volume of efficient output of the state industrial sector. A substantial part of program aid is also being used for the support of the enterprise sector through the medium-term credit program of the state banks. Further supplies of.capital and skills will be necessary but in some cases joint ventures with foreign investors may be the best means of injecting new capital, management and technology into such enterprises. 110. There is nevertheless a growing need for official aid for pro- ductive enterprise in industry and other sectors. The requests for devel- opment loan finance to be channelled through BAPINDO, the state develop- ment Bank, and other financial institutions, for agricultural credit prog- rams and rice processing facilities, and for inter-island fleet rehabilita- - 35 - tion and replacement, are to assist both public and private enterprise. This form of aid will channel resources to the enterprise sector and is relevant to Government plans for increased food production, export growth, industrial expansion and improved transport services, all fields in which the private sector must take the main initiatives for development. The tourism sector is another in which direct Government investment is likely to remain small at least during 1969-74, when only one sizable infrastruc- ture project, for Bali, is planned. Power 111. Over the period 1969-74 it is estimated that the power sector program will involve budgetary expenditures in the' order of $300 million, over half of this in the form of project aid. This would amount to over 10 percent of all service development expenditures and 10-25 percent of the investment in economic infrastructure. 112. This level of investment may be low in relation to the growth of demand for power. The present supply amounts to only about 7 watts per capita compared, for example, to 30 watts in India, and the annual consump- tion in Java of about 25 kwh per capita is among the lowest in the world. Little investment was undertaken from 1939 to 1954-57, when the private companies were nationalized, and only modest additions to generating capacity were made after 1957. The system continued to deteriorate and a comprehen- sive program of rehabilitation and improvement of distribution systems, expansion of high voltage transmission facilities and increased generation capacity is now getting under way to meet existing and projected needs for electric power. 113. The Government recognizes as one of the pre-requisites for effi- ciency in power generation and distribution the need to improve the manage- ment and operations of the state electricity authority, PLN, and to restore a rate structure which was distorted in the inflationary period of the 1960's. Management consultant services have been arranged in the context of an IDA credit for the Djakarta distribution system. It has been agreed that PLN will be re-organized as an autonomous Government-owned corporation to be responsible for the generation, transmission and distribution of all public electricity services, with full responsibility and authority for the management of physical and financial operations, modern systems of financial control and a new and viable rate structure. 114. On this firmer institutional base, a power development program adequate for Indonesia's still modest electricity needs should be feasible. A preliminary evaluation with French technical assistance assessed power demand on a regional and national basis and estimated power generation requirements to 1978 on the assumption of 5 percent GNP growth. The.pro- posed increase of production of 10 percent per annum (11.5 percent load growth because of improvements in consumption flows and the quality of service and a decrease in power losses) may prove conservative if economic, - 36 - and particularly industrial, growth exceeds the base estimate. The prog- ram, defined wherever possible in terms of current regional power systems and development projects already being undertaken, involves expenditures estimated at $330 million in 1969-73 and $430 million in 1974-78, with a foreign exchange component of approximately 70 percent. Generous allowance is made, especially in the first period, for investment in distribution facilities, where rehabilitation is urgent and expansion also needed even to balance existing generation capacity. 115. Substantial aid, about 25 percent of the IGGI total, has already been committed to the sector for rehabilitation and power generation. The power sector also makes up 20 percent of total 1971/72 project aid requests and nearly 25 percent of those for which feasibility studies are complete or in progress. The pre-investment work for power development is proceeding in line with the possibilities of financing and within the framework of a gener- al strategy for the sector. Project implementation is only now accelerating, however, and it is unlikely that project aid will be disbursed rapidly enough for the full 1969-74 program to be completed within the period. Project aid disbursements could reach $175 million during the Plan period in a program involving, with associated costs and national expenditures not directly re- lated to aid, about $300 million for the five years. 116. The main burden of power investment would in these circumstances fall in the 1974-78 period, when any lags in investments would have to be made up, possibly higher rates of national growth and therefore of power demand catered for, and probably investments such as the Asahan power proj- ect made for major industrial and mineral projects still in the planning stage. Telecommunications 117. The Government corporation, PERUMTEL, responsible for telephone, telegraph and telex services is rehabilitating and expanding the telecom- munications system under a five-year program (1969-74) prepared with Aus- tralian technical assistance. The main components are a greatly expanded microwave/scatter network which will connect centers throughout Java and Sumatra and establish links with Bali and Kalimantan; improved telex ser- vices; and a modest increase in telephone connections. 1/ Total costs are estimated at $82 million including a foreign exchange component of about $50 million. Pre-investment requirements have been met and management consul- tant services for PERUIMTEL arranged under an IDA credit which will finance part of the program in association with bilateral aid. 1/ The emphasis in local communications is on the replacement and conversion of obsolete exchanges; the increase of 65,000 in telephone connections will mean a growth rate of only 5 percent per annum, less than the historical growth rate of 9 percent. - 37 - 118. Commitments of project aid for telecommunications services now exceed US$35 million, and a further $12 million is requested in the 1971/72 project lists. This excludes aid for communications services related to marine, railway and air transport which-are independently.operated by their respective agencies. Allowing for time lags in the disbursement of project aid and some expenditures not directly within the program, total budget ex- penditures of around $90 million equivalent, including $40 million of proj- ect aid, seem likely to be incurred during 1969-73 for telecommunications and postal services, supplemented by some resources from the organizations themselves. Transportation 119. In this major sector public investment activity is being concen- trated initially not on capacity increases but on reducing transport costs by rehabilitating highways, railways and ports replacing communications equipment and facilities for improved efficiency and safety and replacing some obsolete railway rolling stock and aircraft for the public enterprises operating in these sectors. Indonesia inherited a sound transportation sys- tem but was able in the period after independence to .finance few major ad- ditions to capacity or, in more recent years, to maintain the existing struc- ture or services adequately. The existing system nevertheless appears to be capable of responding to demand for transport services and could, if effi- ciently operated and maintained, serve most present needs. The resumption of economic progress and the need to open up new areas will, however, call for additional capacity, especially in highways and airfields in the near future. 120. Highways rehabilitation and construction are the largest elements of current and prospective development programs in the transport sector. The rehabilitation and upgrading program has so far been mainly a domestic effort, involving 15 percent or more of rupiah funds available for infra- structure operations and most of the funds now available under the Kabupaten program for district rehabilitation projects. Much of this work is in the nature of routine maintenance work but is necessary to arrest further deter- ioration of the highway system. Operational equipment is in short supply. 121. The investment requirements in the highway sector have been under study by..-a UNDP team, "1968-70 Highway Services," responsible for a survey of the whole system to evaluate priorities and for assistance in planning, project preparation and implementation. 122. The UNDP team recommended an investment program for the rehabili- tation of about 12,000 km of the total 82,000 km in the highway network, and a maintenance program for a further 29,000 km. An IDA credit to help rehabilitate about 3,000 km of these roads in five provinces, improve main- tenance and workshops in these five and a further 15 provinces and provide training and technical assistance in all phases of highway work, is now sup- plementing rupiah financing. Aid from Japan will rehabilitate roads in two - 38 - more provinces, and further commitments .for road and bridge rehabilitation are being sought on the basis of feasibility studies completed or nearing completion. 123. In addition to road improvements there are several major construc- tion projects, including the Djakarta-Bogor Highway, the Sidjungdjung- Lubuklinggau Highway in Sumatra, Balikpapan-Samarinda Highway in Kalimantan and the new road-ferry link between Java and Sumatra, for which aid is cur- rently being planned. A second important series of projects involves de- velopment roads for agricultural areas of high potential in Sumatra. 124. An investment program involving some $72 million in foreign ex- change (65 percent of the total cost) has been identified to date, not in- cluding aid of $30 million already committed. Further studies are in pro- gress but are not likely to lead to new projects which will be implemented during the period through 1973/74. Some of the present projects will also extend beyond this period. Total project aid to the highway sector in the order of $50-$60 million should be disbursed over the period 1969-73, the bulk of it for rehabilitation programs with the main expenditures on new construction projects (with a higher foreign exchange component) occurring in the next Plan period. The related needs for replacement of the road transport fleet, which will require 12-15,000 new units annually, are being met in part by program and (for urban bus services) project aid. Railways 125. The basic railways program for the next five years has been de- fined in terms of requirements for normal maintenance and replacement, in- cluding track and equipment rehabilitation which will contribute to more efficient and less costly operation of the present system. With technical assistance from Germany all main and branch lines have been surveyed and rolling stock and equipment checked. The modest program of rehabilitation justified under present operating conditions is already being undertaken. Some $7 million of aid commitments has been made for track rehabilitation, signalling equipment and diesel locomotives to replace obsolete steam en- gines. Aid requirements for maintenance and minimum replacement needs are estimated at about $2.5 million per annum in a program of $7-8 million, a total of $35-40 million for the five-year period. 126. The potential investment program is much larger, but their justi- fication depends in part on improvements in management and personnel admin- istration as well as the demand for rail services on particular routes. While uncertainties exist regarding the volume and composition of traffic which the railways can attract and carry economically, annual increases of about 14 percent over the next five years, from present low levels, appear to be feasible if operating methods and standards improve. As they do, a first-stage program of modernization would be appropriate both to raise operating standards and speed and to improve the financial position of the state railways. The project list for 1971/72 includes the first elements - 39 - of this wider program, projects for the modernization of 2,000 freight cars to increase maximum speed for 45 to 80 kph and for 12 rail buses for feeder services. The estimate for the costs of completing the first stage over 5 years is $103 million with a further $93-million for full-modernization in the following five-year period. For the present, a cautious approach is being made to investments of this type until the appropriate economic role of railways in total passenger and freight movements can be more clearly defined. 127. In South Sumatra, in particular, decisions on railway investments depend on studies of the movement of goods along the whole Java-Sumatra cor- ridor by road, rail, ferry and coastal shipping. The stage has been reached at which an inter-modal study is essential. The results will have a major bbearing on the future pattern of railways development, as will the urban transport study, also inter-modal in character, to be undertaken in Djakarta this year. The Maritime Sector 128. Infrastructure investment in this sector involves port operation and ship servicing facilities, the dredging program necessary for efficient port operation and the rehabilitation or replacement of sea communications and navigation equipment and official vessels. A total of $14 million had been committed in aid for such programs by the end of 1970/71 and the 1971/72 project list contains a further $36 million in similar aid requirements. 129. Port rehabilitation works have been delayed because feasibility studies except for Tandjung Priok and Surabaya, the two most important proj- ects, have yet to be completed with Dutch technical assistance. Studies for other eight ports in a program for rehabilitating the ten major ports, han- dling 85 percent of total traffic, should be completed by the consultant team during 1971. Further programs connected with ship repair facilities, navigational aids and dredges also appear to be economically justified and are under study. A survey financed by the Netherlands is being undertaken to establish a capital dredging program and assist in the rehabilitation and operation of the dredging fleet. By the end of 1971 the requirements for rupiah and external financing of all the above programs should be known. Some of the improvements required are in organization and management rather than in equipment or facilities. In the short-term the total investment needs may be relatively small. 130. Investigations are also being made to determine the specifics of a rehabilitation and replacement program for inter-island shipping. While surplus capacity exists, many of the ships are obsolete and there is also a shortage of some types of vessel. The order of investment needs for reha- bilitation, some replacement and certain new specialized ships for the inter-island passenger and freight trade should also become clear during this year. - 40 - Aviation Infrastructure 131. Technical assistance has been arranged in this sector for the preparation of an investment program. This program will include the iden- tification and preparation of high priority projects including runway im- provements, and new equipment including telecommunication-and navigational aids, electrical and meteorological equipment and ground facilities. Some of the more urgent requirements have been identified and some aid already committed. Feasibility studies in progress or about to be undertaken should be completed and carefully reviewed before any major' investment decisions are taken. 132. The intensive pre-investment activity of the past two to three years should have produced, by the end of 1971, a set of rehabilitation pro- grams covering much of the transport sector and together defining a major part of the investment requirements for several years to come. Especially in the roads program, a number of new investments has been prepared and are reaching the commitment stage. Each must be treated on its own merits, rather than as an element of a coordinated transport development program, until the base is established for a general approach covering all transport modes. Among the first priorities for inter-modal planning appear to be the study of alternatives or combinations of transport services for the Java-Sumatra corridor and the urban transport study of Djakarta already arranged. 133. The main elements of the transport investment program to 1975 have been determined by decisions on the allocation of budgetary resources over the first three years of the development plan, by IGGI commitments of proj- ect aid amounting to some $75 million and by the requests for further proj- ect and technical assistance for 1971/72. These requests could lead to aid commitments amounting to approximately $200 million, within total costs of approaching $300 million, over the next four to five years. On the basis of past and likely future commitments, disbursements could be of the order of $150 million over the period 1969-74. The Social Sectors 134. In projecting the allocation of resources for the remainder of the period it is assumed that the share of the social programs (including water supply projects) in total expenditures postulated in the Five-Year Plan, about 16 percent of the total, will be maintained. Resources of this order have been provided in each rupiah development budget but, because the proj- ect aid has been limited, the share of total development spending on social programs, from all sources, could be closer to 10 or 12 percent unless extra rupiah allocations are made in subsequent budgets. The project aid already extended for education and family planning will be supplemented by substan- tial technical assistance for health and education programs, family planning, and community development. Family planning programs will receive support from a number of external sources. - 41 - 135. Fuller attention is now being given to the social sectors in the context of national development-program. Particularly in education, however, pre-investment activity,which will lead to the identification of further projects is still in its early stages, although considerable progress has been made in the past year following the establishment of an Office of Edu- cational Development (BPP) assisted by a UNESCO planning team, the prepara- tion and adoption of a "Program for Educational Assistance to the Five-Year Development Plan" and the beginning of informal consultations with groups of countries and organizations interested in Indonesia's educational develop- ment. The Ford Foundation has continued its national assessment of the edu- cation system and preliminary findings are now being discussed. 136. Developments in the health sector are following the pattern estab- lished by the Master Plan for Health. One of the main programs, for the development of referral hospitals, is included in the IGGI project list for 1971/72. Further projects, some of an urgent nature like the request for supplies and equipment for a malaria eradication project also in this list, will be prepared during this year. A much enlarged family planning program has now been planned along with the organization arrangements for its im- plementation. A number of governments and the Ford Foundation are assisting the family planning agency preparing to do so by providing technical assist- ance and other support. In this, as in most social fields, local currency costs, mainly recurrent, tend to form a large proportion of total project costs. Assistance in meeting local currency recurrent costs may be necessary at least in this field to lessen the budgetary impact of the major programs which will be necessary to reduce population growth rates. 137. In the other main field classified in the social sectors, water supply, rupiah expenditures of 2 - 2.5 billion per annum on systems rehabil- itation and extension have been supplemented by project aid for Djakarta, Bogor, Denpasar and Makassar. Technical assistance is required for the planning of major municipal system expansion to the point at which further project aid can be committed, and for management, training and research for new water sources. The priorities include Surabaja, Bandung, Solo and Palembang. 138. Attention is now beginning to be directed to the identification of urban projects other than those municipal water supply and flood control projects already.receiving support from Australia, France, Japan and the Netherlands. Even before the completion of studies needed for a comprehen- sive approach to urbanization problems in Djakarta and other major cities, some projects in urban transport, water supply development and other infra- structure areas will be necessary to ameliorate existing problems without prejudging longer-term development requirements. This was the approach adopted for rehabilitation programs at the national level and it appears to have been sound. Given the complexities of project preparation in urban centers, however, it may be some years before any major structural improve- ment can be implemented. - 42 - The Impact of the Public Sector Programs 139. The development program specified in three successive annual bud- gets from 1969/70, and projected in general terms to 1973/74, will have its major impact in terms not of completed projects but of the direction of Gov- ernment planning and resource allocation along lines which must be followed if the development effort is to succeed. The core of the program is formed by the projects which attract foreign aid. These are the projects which are individually large enough to make an impact in a particular sector, are justified by feasibility studies and implemented, where necessary, with technical assistance to supply experience and technical knowledge not read- ily available in Indonesia. Because the pace of commitments was initially slow--as shown in Appendix Table 3.6, specific loan and grant commitments amounted only to $25 million in 1968 and $130 million in 1969--and because project implementation may spread over a period of years, the results of the cumulatively large disbursements in 1969-74 will show mainly in the following years. In irrigation rehabilitation, for example, only part of the 800,000 nectares to be covered by the IDA program will have regular water supplies by the end of the first Plan period. 140. The aid being channeled through the budget to the production sec- tor, which may amount to 30 percent or more of total disbursements, will also have a positive effect on economic growth which will show mainly in the second Plan period. Because much of this aid will, lead to institutional change and more rapid management and financial improvements than could other- wise be obtained, its ultimate effects on economic organization and produc- tivity could be widespread. 141. The analysis and evaluation of the domestic programs which absorb nearly half of all development budget resources is still in its early stages. Some activities, such as the recently started district and village develop- ment programs, appear from first inspection to be providing useful results; notably with respect to local road and irrigation improvements. Insufficient analysis has been done of these and other pgorams which absorb substantial amounts of rupiah resources. The steps being taken to obtain fuller infor- mation and understanding of such programs include a request for assistance with an inventory of irrigation programs in 1971/72. The progress by BAPPENAS towards establishing better systems of program reporting should make it possible to achieve improved project designs as well as more effec- tive program implementation. 142. The results of development planning will show primarily through the pre-investment activities undertaken in almost all economic and social sectors. They are already producing a large volume of high priority project proposals, increasingly well-prepared and ready for specific aid commitments, in addition to the US$400 million already obtained. The Government's re- port on the status of technical assistance during 1967-70 shows that about 160 separate foreign aid teams and individuals are currently assisting state departments and agencies and that nearly 150 other team an individual as- signments have been completed since 1967. Those still in the field are con- - 43 - centrated mainly in the agriculture, health and education sectors. Many assignments are not directly related to project aid, but over 50 involve pre-investment and feasibility studies which have led or will lead to proj- ect aid requests, mainly for agriculture and the economic infrastructure. The 1971/72 technical assistance lists contain 135 requests for pre-invest- ment and feasibility studies, some for the continuation of services already being supplied, others relating to projects for which commitments are sought for the same year, and many which will lead to detailed investment analysis in areas not yet studies in depth. 143. The attention directed initially to urgent and obvious rehabili- tation needs is now giving way to more general sectoral studies and the identification of sectoral programs in which the investment policies and priorities can be determined for each sector as a whole and for the national program. A much firmer foundation is being laid for the second development plan that existed for the first. In addition, progress is being made towards rebuilding existing institutions which must operate efficiently if the de- velopment process is to accelerate, and in establishing and consolidating new ones including the Investment Board and the high level National Council for Family Planning. From these planning and organization efforts alone, leaving aside the substantial investments in infrastructure and production which will be undertaken and in some cases completed through 1974, the ef- fects of the public sector program on future national development will clearly be positive and large. -44 - CHAPTER 4 ALTERNATIVE PATTERNS OF LONG-TERM GROWTH 144. In the preceding chapter some elements of the sectoral investment programs and their stages of preparation have been reviewed, and a cursory estimate was made of resources which may be available to the public and private sectors. It is not possible at the present moment to integrate these findings and expectations into a comprehensive economic forecast for the next four to five years, as information is lacking with regard to the growth of incomes and output to be generated by current and newly identified investment activities. Import projections are equally difficult for similar reasons, given the incompleteness of investment and output projections. 145. Planning activities for medium- and long-term development usually take place at different levels at the same time: macro-projections of investment, savings, growth and the balance of payments are conceived simul- taneously with detailed sector studies and the preparation of projects and development programs. Their integration and consistency is usually a major task of the agency in charge of economic and social planning. 146. The lack of information on the structure of the economy both at the sectoral and at the overall level has in the recent past hampered the formulation of coherent medium-term programs. The need to start the recon- struction of the economy after 1966 in areas of obvious high priority has at least initially tended to emphasize the project and sector approach. A large number of studies was started since that time and are described in Chapter 3. Many of these studies are now adding to the flow of information on the economy and provide a better basis for planning work at the macro-level. 147. The First Five-Year.Plan (1969-1974) was formulated towards the end of 1968 without the guidance of the necessary pre-investment surveys; the Government does presently recognize the lack of a sufficient basis of the Plan in terms of programs and projects which at that time had reached a stage of preparation providing adequate insight into their economic returns; therefore also the need is felt to reexamine the Plan projections and to incorporate the new programs which are now identified as part of completed and current studies. Also, the experience from the past two years and the prospects for 1971/72 indicate the need for revisions. Once this is done, the stage will be set for the preparation of the Second Five-Year Plan which is to become operational in early 1974. The Government is pres- ently preparing time schedules and organizational proposals for that pur- pose, and intends to draw up a revised program for the remainder of the current Plan peri6d during 1971. 148. Pre-investment studies and other activities, which have the iden- tification of investment programs as their objective, cannot be undertaken - 45 - to the best benefit without a notion of the potentials, priorities and capabilities of the economy as a whole. For this reason, there is merit in attempting projections of macro-economic growth, even if insufficient knowledge of sectors or particular problem-areas would leave such projections rather tenuous and uncertain. The detailed studies of sectors and projects will, at a further stage, provide the evidence which either supports the macro-economic projections, or refutes those. In the latter case the macro framework will need to be recast in order to reflect the findings at the project level, and this may in turn lead to changes in the targets and objectives set for other sectors and for the economy. 149. As an aid to planning for the future by both the Government of Indonesia and the aid-givers, work on longer range macro-economic projections of the possible growth of the Indonesian economy has been started. These projections are intended to illuminate the requirements for the growth of output and income, the constraints on such growth, the resources which may be available, and other related matters. For this purpose a growth model of the Indonesian economy has been constructed. This model is of necessity highly tentative and needs considerable improvement. The basic data with respect to present output, income, savings and investment are deficient; quantitative knowledge of the critical relationships between investment and output, income and savings, input and output generally, and imports and output is limited; knowledge of the way these relationships may change is virtually non-existent. To a considerable degree therefore assumptions based on experience in other countries or fragmentary observations rather than on reliable measurement of Indonesian circumstances are used. 150. The particular results which emerge from use of the model to forecast a number of key variables such as the resources required for var- ious levels of growth of output, the growth of imports, the balance of payments, capital inflow requirements, etc. are sensitive in varying and often high degree to the assumptions made. First computer runs of the model have been made to see what outcomes emerge from particular combina- tions of assumptions about economic facts and their interrelationships and to test the sensitivity of these results to what are assumed to be a reasonable range of variations in the basic assumptions. Considerable time will be required before the model can be improved sufficiently and its sensitivity tested sufficiently to place any confidence in the fore- casts it provides. This chapter merely indicates therefore the nature of the work in progress. 151. The projections of the model are partly based on the estimates of GNP for the years 1968/69-1970/71 presented in Table 20. The official national accounts estimates and the most recent balance of payments and government budgets have been used to make this set of data; gross domestic product estimates and the investment data are taken from the national accounts and all other estimates of resources and expenditures are taken from other sources; private consumption appears as a residual. It is treated in the same way in the model. - 46 - Table 20: GNP, By Type of Expenditures (in billions of rupiahs, 1970/71 prices and exchange rate) 1968/69 1969/70 1970/71La GDP, factor cost 2,934 3,085 3,328 Net factor income to abroad -38 -39 -52 GNP, factor cost 2,896 3,046 3,276 Indirect taxes 142 167 213 Subsidies -52 -39 -37 GNP, at market prices 2,986 3,174 3,452 Imports 391 522 576 Oil sector goods and services 47 70 70 Non-oil, goods 312 412 461 Non-oil, services 32 40 45 Total national resources 3,377 3,696 4,028 Consumption - Private 2,600 2,759 2,868 - Government 196 198 265 Investment 250 346 440 Exports 330 393 450 Oil 115 144 167 Non-oil 215 249 283 of which: Agriculture (186) (215) (242) Mineral (22) (26) (30) Manufactures (7) (8) (11) National saving 190 217 316 /a As the model makes a conditional forecast for 1970/71, data in the tables presenting projections show deviating estimates for this year. 152. The major predetermined variables and the values used for them were obtained as follows. The agricultural foodcrops sector, which in the past has about kept up with population growth, is assumed to develop more rapidly in future years. As compared to 2.5-3.0 percent per annum in the past, a rate of growth of 4.0 percent per year has been projected through 1975, gradually rising after that year to 4.5 percent in 1980. As an alternative to this growth pattern the higher rate of 4.5 percent is assumed - 47 - to be attained by 1975 through gradual increases in growth rates over the five years from 1970, and this rate is then maintained through 1980. 1/ As a rough approximation of the order of magnitude of the program, these rates of growth would imply a combination of one million hectares of irri- gation rehabilitation, full use of pesticides and fertilizers on all irri- gated rice lands in accordance with past BIMAS recommendations, amounting to about 1.0 million tons of nitrogen fertilizer use (urea) by 1980, and half a million or even one million hectares of additional irrigated rice land. Although such targets cannot be considered unrealistic for a period stretching as far as ten years, they would nevertheless constitute a major challenge to agricultural policy and management, and to the provision of adequate infrastructure. 153. Exports are estimated separately for mining products and for other export commodities. For the non-mineral exports -- largely estate crops and forestry products -- the assumptions are comparable to those made by the IMF 2/ in 1968, be it from a higher figure in the base year, 1970; the rate of growth is estimated at about 5 percent per year. For crude oil and minerals considerably higher rates are assumed, especially for the years 1970-1975 when presently known reserves will add to export growth. A doubling of the gross value of these exports over the next five years is postulated, with a levelling off after that year to an average rate of 7 percent per year through 1980. Together these projections for the two main export components constitute a rate of growth of exports of 10.4 percent per year between 1970 and 1975, still somewhat below recent actual rates, and just over 5 percent thereafter. As an alternative, a lower growth has been assumed for oil exports through 1975, at a rate of 10 percent per annum, which reduces overall export growth in those years to slightly less than 8 percent per year. 154. It would be unrealistic to project population growth without taking account of the preparations now being made for a family planning program of significant dimensions. Alternative assumptions are used. The first is that the rate of population growth will rise first, from 2.7 per- cent per year in 1970 to 3.0 percent in 1975, and then gradually declining after that year to 2.5 percent in 1980. As a second, more optimistic variant the rate of growth is assumed stable at 2.7 percent through 1973, then declining to 2.0 percent in 1980. The difference in population size in 1980 would amount to 4.7 percent of the 1970 population. 1/ A higher alternative than the latter is used also at a further stage. 2/ "Debt Profiles and Export Projections for Indonesia," Staff Paper of July 1968. - 48 - 155. Private capital inflows -- defined as net of the servicing of private debt, but before investment income transfers - are assumed to triple over the decade of the 1970's, .from actual inflows of $105 million in 1970/71 to $310 million in 1980; a higher alternative puts the inflow in 1980 at $370 million. It is assumed that only half of this will be in the form of private borrowing the .rest in direct investments. The latter are related to expected investment income transfers. Oil sector investments are excluded both from the import data and the investment and financing side. A small but increasing inflow of suppliers' credits with government guarantees has been assumed, rising from around $10 million in 1970 to $60 million in 1980, probably constituting the upper limit of medium-term credits which the Government would deem appropriate for proj- ects which promise substantial foreign exchange earnings. 156. Data on the existing debt service liabilities as at the begin- ning of 1970, and including the estimated liabilities under the 1970 re- scheduling arrangements, are entered into the data set. Indirect tax rates on domestic and ,imported goods are both assumed to increase by 2 percent per year and, in addition, customs tariffs have been assumed to rise slightly in the years between 1970 and 1975. An alternative is formulated which raises rates of both these tax categories by an additional one per- cent (of base year rates) in each year. Table 21 summarizes the main values of predetermined variables. Behavior of the Model 157. A detailed description of the system of equations, the parameters used and the computing procedure is given in Annex I, and is summarized here. Starting with the data established for 1968 and 1969, the set of equations produces a complete forecast for 1970, which must coincide with the estimated actual data for that year. 1/ Some of the values found for 1970 influence developments in 1971, and in addition the growth performance in 1970 gives rise to growth,expectations which in turn help to define investment expenditures in 1971. The projections for 1971 are thus deter- mined by influences from previous years and expectations for future years, combined with whatever values are set for 1971 for variables, e.g. exports, population and agricultural growth, which are projected independently. Thus, the model produces a complete forecast for 1970 and each subsequent year, and each of those annual projections is a function of events in past years as well as of expectations of future years. 158. The main variables for which values are set outside of the model are the growth of exports and of agricultural food production. The first 1/ With different values of exogenous variables, the "projections" for 1970 are not identical for different alternatives, but devia- tions are not significant. Table 21: Values of Main Pre-determined Variables, 1970-1980 1971 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 Growth rate of agriculture (M) Foodcrops: a) low 3.9 4.0 4.0 4.0 4.0 4.0 4.1 4.2 4.3 -4.4 4.5 b) high 3.9 4.0 4.1 4.2 4.3 4.4 4.5 4.5 4.5 4.5 .5 Population growth () a) low 2.7 2.7 2.7 2.7 2.6 2.5 2.b 2.3 2.2 2.1 2.0 b) high 2.7 2.8 2.8 2.9 3.0 3.0 2.9 2.8 2.7 2.6 2.5 Exports (gross, $ mln) a) high 1,170 1,310 1,450 1,600 1,765 1,925 2,060 2,170 2,270 2,370 2,480 b) low 1,170 1,290 1,405 1,520 1,635 1,750 1,830 1,910 1,990 2,070 2,150 Private capital imports ($ mln) a) high 105 1145 170 195 220 215 270 295 320 345 370 \0 b) low 105 145 165 190 210 225 235 250 270 290 310 Suppliers' credits ($ mln) 451/ 15 20 25 30 35 ho 45 50 55 60 Debt service ($ mln) a) rescheduled 35 35 36 37 37 4 45 45 63 63 63 b) 1967-1969 loans 46 60 75 75 75 75 75 70 65 65 65 c) other debts 37 48 40 30 20 10 - - - - - a/ Including net receipts under so-called merchants' L/C's. - 50 - is separately specified because export values are more closely related to international demand and supply situations, especially for the main agri- cultural exports, or to autonomous supply factors as for crude oil, pet- roleum products, hard minerals and forestry products, than to domestic economic developments. With regard to foodcrops, it is considered unlikely that output growth would adjust itself automatically to the growth of demand, and for this reason it is more logical to set a specific growth target for this sector which can be supported by known techniques and feasible programs. 159. Alternative assumptions can be made for either variables and the model can then be used to test the effects of different assumptions. A comparison, for example, between alternative growth patterns which differ only with respect to the agricultural growth target can demonstrate the consequences of these differences for overall economic growth, resource requirements and the balance of payments. The analysis of trade-offs im- plicit in such assumptions can help to elucidate the relative importance or priorities of policies affecting different parts of the economy. 160. Several more variables are specified in the model to enable an analysis of more alternatives. Population growth is specified to permit an assessment of the consequences of family planning programs; tax rates are specified so that the effects on rates of growth and the balance of payments can be analyzed; private capital inflows are independently pro- jected to make possible an assessment of the effects of various assumptions on public official capital inflow requirements and on official debt and debt service payments. 161. In the model, the growth of agricultural production and of exports determines to a large extent the demand for non-agricultural goods and services. The mutual relationships between sectors of the economy establishes the pattern and the rates of growth of output, and of imports. The difference between the import level derived in this way and the export level as projected provides a conditional estimate of the current account deficit in the balance of payments. 162. Investment in any given year relates to growth in the same year in the sectors where gestation periods are deemed relatively brief, but in most sectors investment levels reflect expectations of future demand and production growth which in turn are based on the current performance of the economy. In turn, investment generates growth of output and income in current and future years. The model uses the concept of sectoral capital-output ratios to represent those relationships; as no such ratios can be determined for Indonesia from past or current data, coefficients are used for other Asian countries which are deemed reasonably representa- tive. This introduces an element of uncertainty into the model which could have significant effect on the projections as presented here. Investment has in itself a major impact on import demand, and this is reflected in the import estimate. - 51 - 163. The determination of the domestic resource gap, which is the difference between investment expenditures and domestic resource mobiliza- tion, requires a separate estimate of savings. The marginal savings rate is treated in the model as a function of the growth of per capita income in the previous year and postulates -- in line with a cross-section of relationships estimated for other Asian countries -- that the marginal savings rate will be higher with accelerated growth rates. 164. The model centers on the resource gap. The basic assumption is that the estimated rates of growth and levels of investment are in accordance with the objectives of Indonesia's economic development and also that the domestic resource mobilization which is projected consti- tutes a realistic target. The amount by which resources fall short of investment requirements therefore represents the need for inflows of net external capital. 165. In the model the resource and the balance of payments gaps are estimated independently and there is no a priori reason why they should be equal. In order to obtain the necessary ex post equality of the two gaps -- which basically are only two different aspects of the same flow of external resources -- there must be adjustment mechanisms. The model contains several. 166. The situation may occur in any year that the resource gap is larger than the balance of payments gap, for example because exceptionally heavy investment outlays without equal growth of savings takes place in a year of buoyant export earnings or lagging import demand, making it diffi- cult to absorb, in the form of additional imports, all the foreign capital needed for the investment program. The model adjusts for this case by assuming full utilization of the foreign capital inflow for investment purposes and the simultaneous addition of part of the country's own for- eign exchange earnings to its reserves. Of course when in other years the situation reverses, reserves can be used to meet part of the balance of payments gap, but in trial runs the calculated additions to reserves have been small and intermittent. Therefore, the model only provides for reserve increases and not for drawdowns. This also seems appropriate in view of the extremely small foreign exchange reserve base at the beginning of the period which in any case needs to be improved, probably more rapidly than the model tends to allow. In this sense, there may be some underestimation of the need for external capital inflows. 167. In circumstances where the balance of payments gap is larger than the domestic resource gap, the latter is again taken as the basic indicator of external resources requirements and the balance of payments gap therefore is adjusted downward. This process can take place in one or in two stages, depending on the magnitude of the required adjustment. First, an attempt is made to reduce the demand for imports by shifting investment resources to sectors of the economy which can produce import - 52 - substitutes efficiently. There are, however, limits to this course of action and for that reason the model includes the assumption that capital costs per unit of output will be raised by this shift, thus increasing the size of the investment program -- and thus the resource gap -- for the same rate of growth. The model also postulates definite upper bounds to import substituting production, put arbitrarily at about 20 percent of added output in the manufacturing sector in each year. 168. After the introduction of import substitution in the investment and output projections, the domestic resource gap and the balance of pay- ments gap can in most cases be equalized without exhausting the full amount of permissible import substitution. In those cases, however, where a residual balance of payments gap still remains after full recourse to import substitution, the only alternative course is to adjust the exchange rate downwards, both to stimulate exports and at the same time to reduce the demand for imports and increase that for domestically producted goods and services, until the two gaps are reconciled. 169. Once a specific pattern of external capital flows is determined, the total of these inflows is calculated in gross terms by adding debt service liabilities; first, this total is distributed between private and public capital, and for the latter an assumption is made with regard to the composition of loan terms and maturities. The future flow of estimated debt service liabilities arising from new borrowing is then added to the liabilities already in existence at the beginning of each year. Effects of Alternative Assumptions 170. The influence of specific variables on economic growth can best be assessed in a comparison between alternatives which differ only with respect to the assumptions made for one single variable, or for a para- meter which may represent policy choices. The alternative assumptions regarding exports, agricultural growth, the increase of population, tax rates and private capital inflows are used in succession for this purpose. Population Growth 171. Differences in population growth rates have their main effect in the model through the demand for food. With a given rate of income growth and an income elasticity for food of well below unity, a higher population growth rate implies a lower growth of per capita income and a larger increa in the demand for food. If the supply of food, and especially of foodgrain is not elastic from domestic sources (such as the model assumes by setting fixed output growth rates) the only recourse is to additional imports from abroad which creates a burden on the balance of payments. 172. A lower rate of population growth under ceteris paribus condition generates in the first place a slightly higher rate of growth of the nation product. This follows from the fact that income elasticities for manufac- - 53 - tured goods and services are well above unity and a higher growth rate of per capita income results in higher levels of demand and output of those goods and services. As agricultural growth is assumed to be the same in both alternatives, the national product increases slightly faster when population growth is reduced. This additional GNP growth in itself in- creases the demand for foodgrains slightly, also compensating to some extent for the reduction of foodgrains demand which is the direct conse- quence of the lesser growth of population. The net effect which the model estimates for the demand for foodgrains is a reduction of consump- tion in 1980 by 0.73 percent of the base year (1970) level for each reduc- tion of population growth of 1.0 percent over the full decade or by 0.1 percent in each year. 173. This lower demand has implications for the balance of payments on the import side by reducing the need for foodgrain imports by the same amount as the reduction of domestic demand. The model indicates that foodgrain import requirements would be reduced by about $30 million for each 1.0 percent reduction of population size in 1980. It is also found that aid requirements will be less by the same amount under those condi- tions, but the reason for this is somewhat more complicated as aid re- quirements are a function primarily of the domestic resource gap. 174. Lower population growth and consequent higher growth rates for per capita income have a significant impact on the marginal savings, as the latter are defined as a function of per capita income growth. Thus, the model shows savings to increase faster when population growth is reduced, and as overall economic growth is only slightly different for the two alternatives, the investment levels,are about equal. Therefore the domestic resource gap is smaller with lower population growth, and the net inflow requirements of foreign capital are equally reduced. 175. The reduction in foreign aid requirements as a result of lower growth of population would put this particular benefit, cumulated over the years of the decade covered, at more than $100 million for each percent less population in 1980. To this the discounted value of future savings, in terms of reduced external borrowing, would have to be added to approach the full value of these benefits. The family planning program which could lead to the target reduction of population growth as used in the alterna- tive runs with the model would cost on current estimates some $50 million for each one percent less population in 1980. Even if this amount had to be fully borrowed on the same terms as apply for present aided foodgrain imports, the benefit/cost ratio on this account alone would already equal a value 2.0. To this would add discounted future foreign exchange savings and the lower levels of education and health investments which could be planned as a consequence. Rates of return far higher than for most other programs could therefore easily be demonstrated; with discounted future foreign exchange savings alone added, the benefit/cost ratio already rises to around 6:1. - 54 - Agricultural Growth 176. The alternatives for agricultural growth are chosen in a manner which restricts the difference mainly to the phasing; the higher alterna- tive is only 3 percent above the lower one in the final year, but the acceleration of growth in the higher alternative takes place in the first, rather than in the second half of the decade. The consequences are more straightforward than in the case of alternative projections of population growth, as in the present case the only major effect is on the demand for imported foodgrains. The calculations indicate that for every additional percent growth in this sector of agriculture, foodgrain imports can be reduced by about $30 million, which roughly tallies with implied volumes and import prices applicable in Indonesia. 177. The growth rates for agriculture as postulated here are insuffi- cient under the conditions applying for the model projections to reach fool self-sufficiency even over the full decade. This is explained to some extent by the rapid growth of output in sectors where foreign investment is now taking place and the resulting growth of exports which stimulate growth in the economy outside those particular sectors. The model project! an average rate of growth of 6-6.5 percent per year in alternative runs, rising to about 8 percent by the end of the decade and as a consequence thl low alternative for foodgrains production would double import requirements of foodgrains over the decade; the higher alternative for agricultural growth would just maintain the import level. In order to obtain food self-sufficiency by 1980, the average annual growth of agricultural food- crops would have to be sustained at almost 5 percent per year; to reach this target by 1975 would require a rate somewhat above 5 percent from 1970 onwards. Indirect Tax Rates 178. Changes in the tax rates, by their nature, change relative pricel between different kinds of domestic goods and services and in relation to import prices. As the model specifies in appropriate cases the tax rates as part of the demand-price equations, it is possible to compare cases with different movements of indirect tax rates and to analyze their impact on the economy. 179. On one assumption, indirect taxes on imports are projected to be increased by a total of 5 percent of present rates, i.e. from an actual (1970) incidence of 23 percent on dutiable imports, to slightly over 24 percent in 1980. At the same time taxes on domestic products are projecteg to rise from the present 3 percent incidence as compared to the GDP, to 3.6 percent, or by 20 percent of the rates, by 1980. The higher alterna- tive maintains the same relative burden on imports and domestic products, but with more substantial rate increases over time: import tax rates are increased by 15 percent to an incidence of 26.5 percent and indirect taxes on domestic output are raised by 30 percent, to almost 4 percent of GDP. - 55 - 180. Between the two alternatives, imports are reduced by $22 million in 1980 for a rate differential of 10 percent on the basic rate. Taken in relation to dutiable imports alone, this amounts to an import reduction of 1.1 percent; the rate of tax increases between 24.2 and 26.5 percent, or by 2.3 percent points between alternatives, which implies an elasticity of demand slightly below 0.5. However, this approach is not proper as it does not reflect the substantial changes in import composition between dutiable and non-dutiable imports. The alternative projections show that dutiable imports are reduced between alternatives by $47 million, but non- dutiable imports increase by $25 million, leading to the net effect analyzed above. Thus, the duty elasticity appears to be much closer to unity, and it is the increase of non-dutiable items in total import payments which needs to be explained further. 181. The model specifies that the consumption of foodgrains is not taxed, neither from domestic output nor from import sources. All other goods and services becoming more expensive, there is a shift in demand towards foodgrains and as domestic production is pre-determined in the model, this additional demand results in added import requirements. 182. The net reduction of imports, combined with a small addition to exports of manufactured goods, improves the balance of payments and reduces the net inflow of capital. Domestic price increases raise the nominal value of the GDP and of investment, but also of savings. In addition there is a small real addition to savings, reducing the resource gap and thus the net capital inflow requirements. 183. Alternative Patterns of Growth: For each alternative chosen with respect to the values of pre-determined variables, difficult rates and patterns of growth emerge. A number of cases is presented in what follows, with different assumptions with respect to agricultural growth, exports and domestic savings. As the first one to be presented, the case is chosen where the most optimistic assumptions have been combined, i.e. where the low rate of population growth applies, exports grow at the faster of the two alternative rates, foodcrop production increases at the higher rate and indirect taxes are increased according to the higher alternative. 184. Under those conditions the gross national product at factor cost increases at an average rate of 7 percent per year during the first half of the decade, and by 8 percent during the next five years. As foodcrops, the major component of agricultural output, grow at a substantially slower rate, the share of agriculture declines continuously in the national product. The mining, manufacturing and construction sectors increase their shares most rapidly. The main elements of the projection alterna- tive are presented in Table 25 (Alternative I). - 56 - Table 22: Changes in the Structure of GNP, 1970-1980 (in percent) Rate of Growth 1970 1975 1980 1970/75 1975/80 Agriculture 51 45 38 4.6 4.6 Mining, manufacturing 15 18 22 11.9 12.0 Construction 3 4 5 13.9 10.6 Transport, power 3 4 5 11.2 12.8 Services 28 29 30 7.4 9.4 GNP at factor cost 100 100 100 7.2 8.1 185. The differences in sectoral growth rates are reflected in the composition of investment expenditures. Between 1970 and 1975 the invest- ment level rises from about 14 percent of GNP to 19 percent; in the next five years until 1980 a slower increase to 22 percent of GNP in the last year is projected. Agricultural investment which is estimated around 30 percent of toal investment expenditures in 1970, gradually falls to 15 percent in 1980, notwithstanding a significant increase in absolute terms over the period. Investments in manufacturing and transport are leading the increase of investment activity. 186. Whenthe assumption is made that the public sector maintains its share of investment activities in each of the sectors as estimated for 1970 -- which includes all investment in power and a major part of transport investment -- the derived level and composition of public sector investment expenditures is not significantly different from the estimates presented in Chapter 3 which are largely based on known investment programs and projected project aid disbursements. 187 The growth of savings is, in percentage terms, more.rapid than the growth of investment, but beginning from a lower base. Therefore the resource gap increases from 1970 to 1975 and only after that year a slow decline of net external financing requirements begins. The marginal rate of savings amounts in the first five years to about 22 percent, rising to 26 percent in the second half of the decade. 188. The pattern of net external capital inflows over time, rising through 1975 and slowly declining thereafter, combines with an export projection which combines high growth -- mainly from oil and forestry products -- in the first five years with a reduced rate of growth there- after. As a consequence imports can rise rapidly in the first five years (there is even some accumulation of reserves) and import substitution needs - 57 - are small. In 1975 the estimates indicate the need to reduce the demand for imports by 6 percent in order to keep their level within the avail- ability of foreign exchange resources. However, after 1975 import demand maintains a fast rise whereas foreign exchange resources do not; as a consequence the need for larger volumes of import substitution arises, and in the last year of the projection period the total requirement exceeds the limit set on the production of import substitutes, which therefore, causes the introduction of the foreign exchange rate as the last resort adjustment mechanism; a devaluation of 6 percent in 1980 is estimated to be required for maintenance of the balance of payments equilibrium. 190. To some extent these unfavorable developments towards the end of the projection period can be traced to particular segments of import demand. The growth of domestic output of foodcrops, as postulated at the beginning of this exercise, is not sufficient to keep pace with the growth of food demand, caused by the rapid growth of per capita income. As a consequence, the projections show increasing dependence on food imports, rising from 1970 to 1975 and stabilizing at a high level thereafter. 191. Imports of goods and services for investment use are assumed to be an almost constant proportion of investment expenditures and this may be overstating import requirements. The changing composition of invest- ment expenditures over time may in itself lead to a reduction of the for- eign exchange component of investment, and the same may be the case with regard to the foreign exchange costs of current industrial inputs. Table 23: Balance of Payments Projection, 1970-1980 (in millions of US dollars) 1970 1975 1980 Exports of goods and services 1,202 1,992 2,742 Imports of goods and services 1,674 2,698 3,319 of which: a) foodgrains 152 235 235 b) investment income 138 270 380 Current account (deficit = -) 472 706 577 Debt service payments 81 203 363 Gross capital inflow 553 909 940 of which: private investment 105 225 310 suppliers' credits 45 35 60 gross public capital 403 649 570 - 58 - 192. Although the current account deficit is declining after 1975, gross capital inflow requirements maintain a slight increase after that year on account of the increase of debt service payments. The latter amount in 1980 to 13.2 percent of gross exports; if the net export defi- nition is used, which excludes the investment income payments and debt service costs of the oil sector from export earnings, the debt service ratio in 1980 amounts to 16 percent of exports, and the level is rising rapidly. In the last three years the amounts added each year to debt service payments equal about 25-30 percent of annual increases of gross exports, and the debt service ratio is therefore bound to rise further. 193. With the assumptions made regarding private capital inflows -- which through 1975 are identical to the projections made in Chapter 2 -- and some minor reliance on net inflows of suppliers' credits, there remains an increasing need for public gross capital inflows (disbursements) through 1975. Total inflows for the five years 1971 through 1975 are estimated at US$2,780 million or an average of US$556 million per year, rising to US$650 million in 1975. The estimates of future resources for the public sector development program in Chapter 3 indicate a continued need for program aid counterpart funds at about the same level as projected for the budget year 1971/72 and the projections of imports presented above indicate under the conditions of the present alternative a continued need for food imports. Program aid could therefore well remain at a level of about US$350 million per year, which then would imply project aid disburse- ments of about US$300 million in 1975. Commitments at that level or some- what higher in thyyears before 1975 would then be needed. The gradual reduction of gross public capital inflows after 1975 could either be the result of lower total aid commitments, or be obtained by a shift in favor of project aid while maintaining the overall commitment level. 194. In one sense, the alternative projection discussed in the preced- ing paragraphs represents optimistic assumptions as it postulates a high savings rate throughout the period, which may be difficult to obtain and to sustain over a full decade. However, the strains which develop with respect to the balance of payments especially in the second part of the period, are leading not only to a high rate of production of import substi- tutes, but in 1980 even to a currency rate adjustment. The severity of the balance of payments problems results mianly from assumed high domestic savings rates, aggravated by the existence of continuing large import requirements of foodgrains. 195. As a second alternative, calculations have therefore been made which reflect the consequences of a somewhat lower marginal rate of sav- ings -- set 10 percent below the one of the previous alternative -- and of a slightly higher rate of growth of foodcrops production. For the latter an average of 4.9 percent per year is now assumed, compared to 4.6 percent in the preceding alternative. The results are shown in Table 26 (Alter- native II). - 59 - 196. These changes in basic assumptions appear not to be very sig- nificant, but the effects on some major variables are of substantial import. Overall economic growth is only marginally affected, and only after 1975. However, the need for devaluation in 1980 does disappear and import substitution is also somewhat reduced. These two results are directly related to the considerably lower import needs of foodgrains, saving about US$35 million of foreign exchange in 1975 and US$160 million in 1980. 197. The lower savings rate widens the resource gap in all years. Instead of the increase to about US$700 million in 1975, followed by a decline to less than US$600 million in 1980, the gap now widens to almost US$800 million in 1975 and further to over US$1.0 billion in 1980. As debt service payments also rise more rapidly as a consequence, the gross capital inflow requirements in 1980 are about US$500 million larger in this than in the preceding alternative. With the same assump- tions regarding private capital inflows and suppliers' credits, public sector capital requirements are almost twice as large in this alternative as compared to the preceding one, at close to US$1,100 million in 1980. 198. It is interesting to note that these larger aid requirements do not reflect a higher rate of development, and only slightly higher rates of investment. It is mainly the more conservative assumption regard- ing the capacity of the economy to generate additional savings, which leads to such widely different estimates of aid requirements. The present lack of knowledge about the factors which stimulate private savings in Indonesia, and the fact that the identification of investment opportunities and the creation of a favorable investment climate are still at an early stage, make it impossible to judge the realism of a 25 percent marginal savings rate as assumed initially, or even the rate of 22.5 percent implied in the second alternative. Equally, an underestimate of capital costs per unit of output would induce a larger requirement of external resources. 199. If public capital disbursements in 1975 are to reach the higher level needed according to the second alternative, of US$744 million, com- mitments would have to reach that level already some years before. With a view to the further rise of disbursement requirements after 1975, a level of commitments around US$800-850 million would be appropriate in 1975, rising to some US$1,200 million by the end of the decade, but to some extent depending on the share of program aid in total commitments in those years. 201. A third alternative is presented here which maintains the assump- tions on agriculture and on savings as in the preceding one, but in addi- tion postulates a lower rate of export growth (see Table 27). Instead of the previous rate of slightly above 9 percent per annum, a rate of 7 per- cent is now used. As export growth is one of the main dynamic factors responsible for the growth of the economy, the first impact is felt on the increase of the national product, and even more significantly on the rate of investment. Savings are also somewhat lower, and together this - 60 -' results in a lower resource gap and a reduction of external public capital requirements, to US$670 million in 1975 and about US$1.0 billion in 1980. Lower capital inflows combined with lower exports would result in larger strains on the balance of payments if all import demands were reduced slightly, in accordance with the slight reduction of overall economic growth. This is the case indeed, with the exception, however, of food- grains where the reduced growth of demand leads to a situation of food self-sufficiency in 1980. 202. Debt Service.Costs and Private Capital Inflows: In the last two alternatives with substantially higher capital inflows, debt service pay- ments rise faster (see Table 24). Table 24: Alternative Debt Service Ratios, 1970-1980 (in percent of gross exports) 1970 1975 1980 Alternative I (high savings, high exports) 6.7 10.1 13.0 Alternative II (low savings, high exports) 6.7 10.5 14.8 Alternative III (low savings, low exports) 6.7 11.1 16.3 203. These estimates are based on the assumption that public capital will be supplied on average DAC-term or IDA-terms and their equivalents, in proportions as provided at present. They are also based on one set of assumptions regarding the inflow of private capital. A larger share of private capital in total inflows would reduce the debt service liabilities on public borrowings; for 1980 the difference for alternative assumptions works out as a decrease of US$1.0 million of debt service payments per year for each additional stream of private capital of US$5 million in the preced ing five years. Thus, the debt service ratios in 1980 would be overesti- mated by one percentage point if private capital inflows in the period 1975-1980 were underestimated by some US$125 million per year, or by about 50 percent as compared to the assumptions used for the present projections. 204. The findings which emerge from the use of the model to test al- ternative projections of some of the main economic variables affecting economic growth in Indonesia must be considered highly tentative. The data base is in many respects far from satisfactory and in some very weak. More information is needed as a basis for the assumptions made with regard to the possible rate of growth of exports, agricultural production or any of the independent variables in the model. There is also uncertainty in regard to the relationship assumed between various elements of the model and the value of the coefficients used in the first runs of the model, for example with regard to the relationship between investment and the growth of output in various sectors. These have had to be selected in some cases - 61 - on the basis of what is known of other developing, particularly Asian, economies rather than information on Indonesia. The results are especially sensitive to some of these values. 205. The results of the first runs of the model as now structured suggest that under assumptions of favorable trends in agricultural out- put, exports and savings, and assuming the implementation of a major family planning program, a satisfactory rate of economic growth is possible in Indonesia over the next decade provided that in the period the inflow of external resources, public and private, is substantially in excess of present inflows. Even this generalized conclusion, let alone any more precise determination of external resource requirements, is subject to modification on the bases of what may be reasonable altera- tions in the structure of the model and in the values assumed for some of its parameters. Furthermore, the implications with respect to aid commit- ments requirements depend on the level of inflow of private capital. It is for this reason that this chapter must be regarded solely as a descrip- tion of work in progress rather than as a statement of conclusions. The work to date, however, including the results of several runs on somewhat different assumptions are a guide to the main determinants of the resource gap confronting the Indonesian development effort. 206. Underlying all forecasts of longer term possibilities and al- ternatives is a short but impressive record of Government action in im- plementing rational monetary and financial policies, mobilizing domestic resources and planning for their effective use, and limiting the inflow of external resources except on terms consistent with the need to maintain external balance. The size and scope of current aid to Indonesia is at least in part an international response to these achievements. The rapidly accelerating inflow of private foreign capital is also an expression of confidence in recent performance and future potential. No projection of sustained growth of the economy would be tenable, however, without the maintenance of sound economic policies and the consolidation of present efforts to use efficiently the domestic and external resources available for economic development. - 62 - Table 2 : Projections 1970-1980.- Alternative I (in billions of rupiahs) Population : low growth assumption Foodorops : high growth assumption Exports : high growth assumption Marginal Savings: high alternative Percent Rates of Growth i97 1975 1980 1970-1975 1975-1980 Gross Domestic Product at factor cost 10 4.675 6 880 .2 8.1 Agriculture 1,684 2,110 2 84 4 7 Mining, quarrying 161 305 460 13.6 8.5 Manufacturing 334 565 1,070 11.0 13.7 Construction 116 220 367 13.9 10.6 Transport, communication 66 112 203 11.2 12.6 Power 15 26 49 11.6 13.5 Services 934 1,337 2,093 7.4 9.4 Net factor income payments -52 -102 -152 Gross National Product, factor cost 3 4,53 '2.0 8.0 -In=Ict taxes net of subsidies 181 362 522 14.8 7.7 Gross National-Product, market-prices 3,43 4 7 .5 8.0 Imports of Goods,Services 633 1,020 1,330 10.0 5.5 Total National,Resources .072 5,5 8.8 L.2 7.6 Expenditures--on National Resources: Exports 455 753 1,100 10.6 7.9 Fixed Investment 462 887 1,467 13.9 10.6 Consumption 3,155 4,315 6,013 6.5 6.9 Gross National Savings 284 620 1,236 16.9 14.8 Consumption per capita (8) (five-year ta. (five-year totalt) Resource Gap (S million) 472 706 577 3,035 2,635 Debt Service Payments 81 203 363 805 1,440 Gross Capital Inflow 553 909 940 3,840 4,075 Private investment 105 225 310 935 1,355 Suppliers' credits 45 35 60 125 245 Public capital 403 649 570 2,780 2,475 Percent of GNE, factor cost: Investment 14.2 19.4 21.8 Savings 8.2 12.6 17.0 Resource Gap 6.0 6.8 4.8 - 63 - Table 26: Projections 1970-1980 - Alternative II (in billions of rupiahs) Population : low growth assumption Foodcrops : new upward revised assumption Exports : high growth assumption Marginal Savings: low alternative Percent Rates of Growth 1970 19 1980 1970-1975 1975-1980 Gross Domestic Product at factor cost 0 4,672 6 Agriculture 1,684 2,127 2,727 4.8 5.1 Mining, quarrying 161 305 460 13.6 8.5 Manufacturing 331 545 1,028 10.5 13.5 Construction 115 217 385 13.5 12.1 Transport, communication 66 112 203 11.2 12.6 Power 15 26 49 11.6 13.5 Services 934 1,340 2,095 7.5 9.4 Net factor income payments -52 -102 -152 Gross National Product at factor cost 3254 4,570 8.957. Indirect taxes net of subsidies 182 356 541 14.4 8.7 Gross National Product at market prices 38436 4,926 7 Imports of Goods, Services 635 1,052 1,424 10.6 6.2 Total National Resources 4071 5 8760 8.0 Expenditures on National Resources: Exports 455 753 1,100 10.6 7.9 Fixed Investment 458 869 1,540 13.7 12.1 Consumption 3,158 4,356 6,120 6.6 7.0 Gross National Savings 278 569 1,141 15.4 14.9 Consumption per capita (8) 69 84 105 4.0 4.6 (five-year totals) Resource Gap (S million) 477 796 1,055 3,346 4,139 Debt Service Payments 81 208 402 818 1,546 Gross Catpial Inflow 558 1,004 1,457 4,164 5,685 Private investment 105 225 310 935 1,355 Suppliers' credits 45 35 60 125 245 Public caDital 408 744 1,087 3,104 4,085 Percent of GNP, factor cost: Investment 14.1 19.0 22.7 Savings 8.1 11.5 15.6 Resource Gap 6.0 7.5 7.1 - 64 - Table27: Projections 1970-1980 - Alternative III (in billions of rupiahs) Population : low growth assumption Foodcrops : new upward revised assumption Exports : low growth assumption Marginal Savings : low alternative Percent Rates of Growth 1127 19 1980 E 1.2M 1975-1990 Gross Domestic Product at factor cost 3,301 4.602 6.748 7.9 Agriculture 1,684 2,116 2,715 4.7 5.1 Mining, quarrying 161 272 380 11.1 6.9 Manufacturing 331 546 1,002 10.5 12.9 Construction 110 204 359 13.1 12.0 Transport, communication 66 111 197 11.0 12.1 Power 15 25 48 10.7 13.9 Services 934 1,328 2,047 7.3 9.0 Net factor income payments -52 -102 -152 Gross National Product at factor cost 3,249 4,500 6,596 6.7 8.0 Indirect taxes net of subsidies 179 333 499 13.2 8.4 Gross National Product at market prices 3,42 4,8 7057 8.0 Imports of Goods, Services 619 960 1,263 9.2 5.6 Total National Resources 4047 8,358 _A8 Expenditures on National Resources: Exports 455 686 886 8.6 5.3 Fixed Investment 441 816 1,435 13.1 11.9 Consumption 3,151 4,291 6,037 6.4 7.1 Gross National Savings 277 542 1,058 14.4 14.3 Consumption per canita (8) 69 82 104 3.5 4.9 (five-year totals) Resource Gag (S million) 436 726 996 3,066 3,957 Debt Service Payments 81 202 382 796 1,476 Gross Capital Inflow 517 928 1,378 3,862 5,433 Private investment 105 225 310 935 1,355 Suppliers' credits 45 35 60 125 245 Public capital 367 668 1,008 2,802 3,833 Percent of GNP, factor cost Investment 13.6 18.1 21.8 Savings 8.1 11.2 14.9 Resource Gap 5.5 6.9 6.9  ANNEX 1 INDONESIA - SIMULATION MODEL FOR MEDIUM-TERM PROJECTIONS 1. The model considers agricultural growth and exports as the prime dynamic forces of the economy. The externally determined demand for Indo- nesia's exports -- or, as the case may be, supply limitation of export products -- generates directly the growth of output in the export-oriented agricultural and mining sectors. The output of agriculture, other than for exports, is determined outside the model as the many factors responsible for agricultural growth do not lend themselves easily to accurate quanti- tative presentation. The output of manufactures, on the other hand, depends mainly on domestic consumption and investment expenditures, including oppor- tunities for import substitution. Output of the transport, power and other services sectors are determined by overall economic growth. 2. Thus export growth and agricultural development, through their impact on income and demand, generate increases of the output of other sectors which, in interaction, result in some particular rate of growth of GNP. Investment requirements are then determined as a function of economic growth; simultaneously, domestic savings are obtained in relation to the growth of income. The domestic resource gap is thus established. External resources are needed to finance investment and growth in the absence of adequate domestic savings. The net capital inflow requirement is obtained directly as a function of the resource gap; the required gross inflow of public capital is derived by the subtraction of independently projected private capital inflows and the addition of debt service liabili- ties on public borrowing. 3. The sum of export earnings and net capital inflows constitutes the available foreign exchange resources for the financing of imports. As import demand is determined as a function of sectoral and overall growth of output and income, however, there is no a priori guarantee that import demand will remain within the limits of available foreign exchange resources. In the event that import demand exceeds available foreign exchange, the only short-run adjustment mechanism short of direct import controls would be through changes in relative prices of imported goods and services. This can take the form of an increase of import tariffs -- unlikely to be ef- fective under Indonesian conditions -- tightening of import credit or, in persistent and difficult cases, a change of the exchange rate. 4. On the other hand, if adequate foresight is assumed and develop- ment programs for the longer term have been soundly made, the country may be able to avoid the need for short-term adjustments through timely invest- ments for the production of exportable goods and import substitutes. Through import substitution, the demand for imports can be reduced and brought in line with the availability of foreign exchange. It is specified in the model that import substitution would be utilized, whenever possible, to meet the excess of the balance of payments gap over the resource gap. ANNEX 1 Page 2 5. However, it would be imprudent to assume that import substitutes can always be produced in sufficient quantities to meet this requirement. Not only must import substitutes be produced in accordance with the dictum of comparative advantages, but must also make full use of economies of scale, and of possible advantages of linkage to other industries. Higher capital costs per unit of output are assumed for import substituting invest- ment, as the composition of import demand itself directs these investments towards capital intensive sectors and the use of modern technology. The model also specifies an upper limit to the growth of import substituting production. 6. If a residual balance of payments gap remains even after maximum feasible import substitution is effected, the model prescribes currency devaluation as the instrument of last resort for adjusting the balance of payments gap. In the model, devaluation of the exchange rate decreases the import demand for goods and services through price effects, decreases the share of manufactures in total consumption expenditures by inducing a general increase in the price of manufactures, and increases exports of manufactured products. The extent of the devaluation depends on the mag- nitude of the residual balance of payments gap after maximum feasible import substitution. 7. In the early years it may happen that the rapid rise of aid disbursements leads to a situation where the availability of foreign exchange outstrips the slower rising demand for imports. In this situation, the model is made to transfer this "excess" foreign exchange to the foreign exchange reserves. As base-year reserves are negative and the additions are modest in most cases, no effort is made to include a mechanism which would result in reserve draw-downs during subsequent years. 8. Another important variable, although of a non-economic character, is population growth. Through its impact on the composition of demand and indirectly on the balance of payments, its influence on the pattern of growth is assessed as completely as possible. Therefore,the model lends itself to an evaluation of the consequences of a family planning program in economic terms. 9. For the estimation of debt service liabilities, the gross capital inflow in the public sector is assumed to consist of three components. A share of 85 percent is to be provided on DAC terms (2.5 percent interest, 8 years of grace and a total maturity of 30 years), 12 percent on IDA terms and the remaining 3 percent on IBRD terms. This corresponds closely to the present aid composition, with the exception of Bank-type lending. The pre-1967 debt is treated in accordance with the Paris Minute of April 24, 1970, assuming full use of the deferral clause in the first six years. Small but increasing amounts of suppliers' credits are added to the inflows, as was suggested by Dr. Abs in his report to the Paris Club of July 1969. ANNEX 1 Page 3 10. Detailed description of the system of equation are as follows: l/ I. Exports 1 1 Exports of oil (Eo) and agricultural, products (Ee) are predeter- mined, while the growth of manufactured exports EA) is determined by the growth rate of total manufactures output in the previous year and changes in the exchange rate (&X): 1 (1) Eo = given 1 - (2) Ee = given 1 1 -7/T + (3) Em = Emtl + 2 (Ysm + Ydm )/(Ysm + Ydm - 1 II. Investment 11. Investments in each of the sectors are related to output by in- cremental capital-output ratios. Investment expenditures on food crops (Ia) export-oriented agriculture (le) and other-*agriculture (lo) are determined by the projected increase in output, with an assumed gestation period of one year. In export-oriented agriculture and mining, output depends on both the quantity of exports and the domestic use of the sector's products. (4) .Ia 1.8(Ya - Ya) (5) Te = 2.3{ 0.7(Ee - Ee + De - Det1 (6) lo = 1.5(Yot+1 - Yo) (7) Imn = 2.5 f0.6(Eet+1 - Eo + Do- Do ) The Y's represent value added in the respective sectors, the E's exports, and the D's, domestic demand. 12. Investment in domestic-type manufacturing industries (Idm), import substituting industries (Ism), and construction (Ic) are determined by the increases in value added in the respective sectors without any assumed period of gestation. 1/ All variables refer to year t except where otherwise indicated. Values of the parameters given are tentative and for illustrative purposes only. All variables are in constant Rupiahs except for variables with superscript which are expressed in U.S.$. A complete definition of all variables is attached as Appendix 1. ANNEX 1 Page 4 (8) Idm = 2.5 (Ydm - Ydmt-1) (9) Ism = 3(Ysm - Ysm t) (10) Ic = Yc - YC The determination of investments in transport (Itc), power (Ip) and other services (Is) is relatively more complex. Investment decisions in these sectors are assumed to be based on the expected future growth of output which, in turn, is assumed to be a function of-the GNP growth rate in the previous year (gt-1 (11) Itc = 5 { 2.5(gt - 1)Ytct-1) (12) Ip = 8 { 2.8(gt1 - 1)Ypt-1 (13) Is = 2.0 1.5(gt-1 - 1)Yst-1 Total investment (I) equals the sum of investments in each of the sectors: (14) I = Ia + Ie + Io + Imn + Idm + Ism + Ic + Itc + Ip + Is III. Consumption 13. Total consumption expenditures (C) is defined as the difference between total income (Y, national income at factor cost, plus T, indirect taxes) and total savings (S). Food consumption (Ca) is composed of two components, one depending on population growth (gp) and another which is determined by the growth rate of per capita consumption expenditures (C/C - gp) multiplied by a constant elasticity of demand. Consumption demand for manufactured goods is also determined by population growth and the growth rate of per capita income in the previous year multiplied by a constant elasticity of demand. In addition, changes in the exchanges rate affect the level of consumer demand for manufactures through induced changes in the general price level of manufactured goods. Consumption of other goods and services (Cn) is defined as the residual item. (15) C = Y + T - S (16) Ca =0.45(C/Ct-1 - gp) + gpA Cat-1 ANNEX 1 Page 5 (17) Cm. = 1.65(g1 - t-1) + gp{1 - 0.25,aX} Cmt- (18) CO = C - Ca - Cm IV. Intermediate Demand 14. Domestic demand for export-oriented agricultural products (De) is determined by the growth of domestic manufacturing (Ydm - Ydm ), while demand for agricultural inputs (Df) and oil-products (DO) are multiplier relationships of the agricultural growth rate (Ya/Ya and the growth rate of GNP, respectively. t-1 (19) De De + 0.10(Ydm - Ydm t) (20) Df = Df + 4(Ya/Ya - 1)Df t-1 t-1 t-1 (21) Do Dot-1 { 1.5(g - 1) + 1) V. Import Demand 15. Demand for each type of imports relates t6"the level of the activities using these goods and services, and to changes in the exchange rate, except for food imports which are assumed to be not influenced by price changes. Food imports (Ma) equal the previous'year's"imports, plus the increase in food consumption less the increase in domestic output of food crops. (22) Ma = Mat-1 + Ca - Cat-1 - 1.15(Ya - Yat-1) 16. Import demands for manufactured goods as a proportion'of total consumer demand for manufactured goods is assumed to increase as the level of per capita income increases (but an increasingly larger proportion of this demand is met by import substitution). Import 'demand'for manufactured goods is further assumed to be dependent on the change in exchange rate (&X) and import tariffs (tm). (23) Ncm =0.09f1 + 0.5(t-gpt-1) Cm 1 - 2(Xt) - 2(tm - 1) (24) Mr = 0.30 [Ydm + Ysm 1' - 0.5(X-Xo)) X0 ANNEX 1 Page 6 17. Import demands for investment goods (Mi), services (Ms) and agricultural inputs (Mf) are determined respectively by the levels of investment (I), the GNP growth rate (g) and the difference between total demand and domestic output of agricultural inputs (Df - Sf), as well as by changes in the exchange rate. (25) Mi = tit-1 + 0.44(1 - It-1)(1 - 0.5 tX) (26) Ms = st-1 (1 + 1.2(g - 1))f1 - 0.5AX) (27) Mf = (Mft-1 + Df - Df - Sf + Sft-1)(1 -aX) 18. All the following variables with superscript refer to the values of import demand in US$ terms. International prices of imports are assumed to be constant, so that the base year-exchange rate, and not the current rate, is used to convert values in constant domestic prices to values in US$. 1 (28) Ma = Ma/Xo (29) Mem = Mcm/Xo (30)-Mr = Mr/Xo (31) M = Mi/Xo (32) Ms = Ms/Xo (33) M1 = Mf/Xo VI. Income 19. Value added in food crops, (Ya), and other agriculture, (Yo), are pre-determined, while value added in mining, Ymn), export-oriented agricul- ture, (Ye), and manufacturing industries, (Ydm), are constant ratios of total output. Value added in construction (Yc) is assumed to be a constant fraction of total investment expenditures (I). ANNEX 1 Page 7 (34) Ya = given (35) Yo = given (36) Ymn = 0.6(Eo + Do) (37) Ye = 0.73(Ee + De) (38) Ydm = 0.3 f(Cm - Mcm) + (0.701 - Mi) + Sf + Em)) (39) Yc = 0.251 20. Value. added in transport and communication (Ytc), power (Yp), and services,(Ys)',, are equal to last year's value plus increase attributable to previous year's investment expenditures (allowing for the long gesta- tion period of capital investments in these sectors). (40) Ytc = Ytct-1 + (Itct-3/5.0) (41) Yp Ypt-1 + t-3/8.0) (42) Ys Ys t-1 + (Ist-2/2.0) 21. The excess of the balance of payments gap over the resource gap is equal to the difference between total import demand and total foreign exchange avafI;I 0. for imports (ml) which includes both export earnings and e Value added in import substituting production is- initially assue&to be a constant fraction of this difference, thus imply- ing that thWs drence is completely filled by import substitution. Sub- sequent sectionsgof the model will determine whether this tentative value is feasible. (43).Ysm = 0.25(Ma + Mcm + Mlr + Mi + Ms + M 1 +My + Mo 1)Xo Thus, tdtal incom (Y) is determined as (44) Y = Ya + Ye + Yo + Ymn + Ydm + Ysm + Yc + Ytc + Yp + Ys VII. Indirect Taxes 22. Indirect taxes (T) are the-sum of import duties and other in- direct taxes less- spbsidies (U). (45) T = 0.26Fm(Mcm + Mr + i + Mo) +0.03tdY - 0 Where tm is the import duties rate and td the indirect tax rate. ANNEX 1 Page 8 VIII. Savings 23. The marginal propensity to save is assumed to be a multiplier relationship of the increase in per capita income in the private sector and constant for the public sector, so that total savings is defined as: (46) S = St1 + {3.2(gt1 ) + 0.08)fY - Yt-1 + 0.32(T - Tt-1 IX. Limitations onjIport Substitution 24. In the model, import substitution is first assumed to be exactly equal to the residual balance of payments gap. If this value turns out to be less than the previous level of import substituting production, the excess foreign exchange is allocated to reserve and import substitution assumed to be equal to last year's level. On the other hand, if the initial value exceeds the predetermined level of maximum import substitution, import substitution is reduced to a level below the maximum. The remaining balance of payments gap is then remedied by devaluation of the currency. 25. The following equations are self-explanatory: GNP Growth Rate (47) g = Y/Y Resource Gap (48) B = I - S (49) B' = B/X Available Foreign Exchange for Imports (50) M' = E' + B' Exchange Rate (51) X = t-(1+&X) Actual Imports of Goods and Non-factor Services (52) AM1 = Ma + Mcm + Mr + Mi + Is + MI + Mo - (Ysm/0.25Xo) Increase in Reserve 1 (53) My = given (investment income abroad) (54) DR 1 - AM M ANNEX 1 Page 9 Debt Service Payments (55) P = Pa + PO + Ph + P + Ps + Pb Gross Capital Inflow (56)G1 = B p 1 Aid Requirements (57) K given (private capital inflow) (58) Q1 = given (suppliers' credits) (59) A = G1 - K1 -Q1 (60) A = 0.85A1 (DAC terms) (61) As = 0.12A1 (IDA terms) (62) Ab = 0.03A1 (Bank terms) (63) Apj = 0.65(MI - K1 - Q1) (Maximum absorption of project aid) 1 1 1 (64) Apm = A - Apj (Minimum requirement of program aid) 26. The programming system for the model is sumarized in Appendix 2.  APPENDIX 1 List of Variables Endogenous Exogenous Variables Variables 1. Gross value added in agriculture, foodcrops Ya 2. Ibid., Livestock, forestry, fishing Yo 3. Population growth (index base = 1.00) gp 4. Export of crop products sEe 5. Export of mineral products Eo 6. Tariff rates (per unit) tm 7. Exchange rate (Rp per $) in base year X0 8. Goods imports for minerals operations ($) 9. Investment income payments ($) My 10. Private capital inflow ($) K1 11. Suppliers' credits ($) Ql 12. Domestic production of agricultural input Sf 13. Domestic indirect tax incidence (per unit) id lh. Maximum limit of import substitution MXsm 15. Subsidy payments U 16. Debt service, Abs arrangement ($) 17. Debt service, other pre-1967 PO 18. Debt service, suppliers' credits Ph 1 19. Debt service, new aid, DAC P 1 20. Debt service, new aid, IDA P A 21. Debt service, new aid, IBRD P A 1 22. Export of manufactures ($) Em 23. Total exports ( El /1 Sub-routines representing aid terms and service payments. APPENDIX 1 Page 2 Endogenous Exogenous Variables Variables 24. Investment, foodcrops Ia 25. Investment, other agriculture Io 26. Investment, mining In 27. Investment, exports crops le 28. Investment, domestic-type manufacturing Idm 29. Investment, import substituting manufacturing Ism 30. Investment, construction Ic 31. Investment, transport, communication Itc 32. Investment, public utilities Ip 33. Investment, other services Is 34. Total fixed investment I 35. Total consumption expenditures C 36. Consumption expenditures, food Ca 37. Consumption of manufactures Cm 38. Other consumption expenditures. Cn 39. Domestic use of export crops De 4O. Intermediate demand of agricultural inputs Df 4l. Domestic use of oil products Do 42. Food imports (Rp) Ma 43. Manufactures import for consumption (Rp) Mcm 44. Imports of industrial raw materials (Rp) Mr 45. Imports of investment-related goods (Rp) Mi 46. Imports of ("non-oil") services (Rp) Ms 47. Imports of agricultural inputs (Rp) Mf 48. Food imports ($) MR APPENDIX 1 Page 3 Endogenous Exogenous Variables Variables 49. Manufactures imports for consumption $)M 50. Imports of industrial raw materials ($) M1 1 51. Imports of investment-related goods ($) Mi 52. Imports of ("non-oil") services ()Ms 1 53. Imports of agricultural inputs ($) Mf 54. Gross value added, mining Ymn 55. Ibid., export crops Ye 56. Ibid., construction Yc 57. Ibid., domestic-type manufacturing Ydm 58. Ibid., import substituting manufacturing Ysm 59. Ibid., transport, communications Ytc 60. Ibid., public utilities Yp 61. Ibid., other services Ys 62. Gross National Product at factor cost Y 63. Indirect tax receipts (net of subsidies) T 64. Gross national savings S 65. Current account deficit ( +) (Rp) B 66. Current account deficit ( +) ($) B1 67. Foreign exchange available for imports ()M 68. Growth of GNP g 69. Change of exchange rate (percentage) AX 70. Exchange rate (Rp per $) X 71. Actual imports of goods and non-factor services ($) AM1 72. Increase in foreign exchange reserves ($) DR1 73. Total debt service payments ($) P1 APPENDIX 1 Page 4 Endogenous Exogenous Variables Variables 74. Gross capital inflow sGl 75. Public capital inflow (gross, $) Al 1 76. Aid on DAC terms Ad 1 77. Aid on IDA terms As 1 78. Aid on IBRD terms Ab 1 79. Maximum absorption of project aid ($) Apj 1 80. Minimum requirement of program aid $)Apm APPENDIX 2 Main Program 1. The main program, BSIMEAP, is a modified version of the Economics Department's BSIMLXO. This program reads the exogenous variables, then calls subroutine EQUAT which contains the model's system of equation. Unlike BSMLXO, however, the new program does not include an iterative routine and assumed that the endogenous variables are computed once control is returned to the main program. The main program will call EQUAT once only for each year. 2. After the endogenous variables are determined, BS-MAP will call a series of subroutines which calculate debt service requirements and print output data and summary tables. Then the endogenous variables for year t are read in as lagged variables for t+l and the program proceeds to repeat the entire process described above for year t=1, until t+l equals end year. EQUAT 3. Subroutine EQUAT solves the model's system of equations as follows: First, the exogenous and lagged variables are read in from the main program. Then the exchange rate is set to the previous year's level. With a given exchange rate, it is possible to express the simultaneous portion of the model as a linear set of equation in the form AX - b, where A is the set of structural coefficients, X, the endogenous variables and b, the para- meters and exogenous variables. This set of equation is solved by calling another subroutine, INVERT, which inverts the matrix A. The vector X is thus computed by the equation X = A-lb. 4. The subroutine then proceeds to the tests concerning import sub- stitution requirements. If the computed import substitution requirement is less than previous year's, the requirement equation is eliminated, import substituting production assumed to be equal to last year's level, and the excess foreign exchange allocated. to reserve. The new set of equation is again solved by the same procedure discussed above. Similarly, if the import substitution requirement is greater than the predetermined maximum, then the domestic currency is devalued by steps of 2 percent until the require- ment is below the maximum. In addition, these are subroutines to insure the non-negativity of the variables. APPENDIX 2 Attachment BSIMEAP EQUAT READ EXOGENOUS -_-___VARIABLES AND READ EXOGENOUS LAGGED VARIABLE VARIABLES, DEBT INFORMATION SET EXCHANGE RATE= LAST YEAR'S RATE SET t = first year SET UP SIMULTANEOUS CALL EQUAT PORTION OF MODEL AS AX = b INVERT ALL DO1VERT >IWVERT CALL SUBROUTINES TO COMPUTE DEBT SERVICES X = A-lb PRINT OUTPUT IS StMax >EXCHANGE RATE Yes BY (FURTHER) 2% COMPUTE SUNARY TABLES COMPUTE OTHER ENDOGECOUS VARIABLES CALL EXIT STATISTICAL APPENDIX Table Number Title 2.1 Gross Domestic Product by Sector of Origin, 1968-1970 3.1 Balance of Payments Estimates, 1969-1971/72 3.2 Imports by Commodity Group and Type of Financing, 1969/70 3.3 Imports by Commodity Group and Type of Financing, 1970/71 3.4 Aid Commitments and Disbursements, 1968-1970/71, by Years of Commitment 3.5 General and Specific Project Commitments, 1968-1970/71 3.6 Specific Commitments and Disbursements of Project Aid (L/C's opened), 1968-1970/71 3.7 Commitments and Disbursements of Program Aid, 1968-1970/71 5.1 Routine Government Receipts, 1970/71 and 1971/72 5.2 Routine Government Expenditures, 1970/71 and 1971/72 5.3 Rupiah Expenditures of the Development Budget,1970/71 6.1 Medium-Term Credits, 1969-70 10.1 Projection of Private Foreign Investments 10.2 Approvals and Disbursements of Private Foreign Investment 10.3 Projection of Private Domestic Investments 10.4 Approvals of Private Domestic Investments  Table 2.1: Gross Domestic Product by Sector of Origin, 1968-1970 (at factor cost, in billions of Rp., 1970/71 prices and exchange rate) a/ a/ b/ 1968 1969 1970 Agriculture 1,604 1,617 1,678 Food Crops 1,264 1,271 1,320 Export 175 178 183 Other 165 168 175 Mining 100 139 160 Manufactures 262 296 340 Construction 62 80 120 Public Utilities 13 l4 15 Transport . 57 60 67 Other Services 836 879 948 GDP Factor Cost 2,934 3,085 3,328 a/ Official estimates, Central Bureau of Statistics b/ Estimated by the Mission  Table 3.1: Balance of Paments Ebtimates, 1969/70-1971/72 (in millions of US dollars) 1969/70 1970/71 1971/72 Exports of Goods and Services Gross oil exports 380 447 580 Non-oil exports 659 749 840 Total Exports 1,039 1,196 1,420 Imports of Goods and Services Foodgrains 212 149 143 Other food 53 53 60 Non-food consumer goods 158 185 210 Total Consumer Goods 423 387 413 Agricultural inputs 56 26 30 Industrial inputs 234 247 270 Investment related goods (excl. oil) 394 560 733 Oil sector goods & services 121 139 175 Investment income payments 109 134 182 Non-factor services (excl. oil) 106 119 123 Total Imports 1,443 1,612 1,926 Current Account Deficit 404 416 506 Financing: Project aid. b/ 52 110 175 Program aid - 307 291 370 Direct private investment 51 103 135 Suppliers' credits -17 -30 - Short-term credits - 37 - Total 393 511 680 Debt service payments/ -85 -120 -147 Monetary movements (excl. SIR) 78 13 -27 Total capital and monetary movements 382 404 506 Net errors and omissions 22 12 - aJ Including debt service and hire-purchase payments of the oil sector. b/ Based on L/C's opened for connitments since 1967 and arrivals for pre-1967 project aid. c/ Based an L/C's opened. Source: Bank Indonesia Table 3.2: Imports by Commodity Group and T'ype of Financing-1969/70 (in millions of US dollars) Food- Other Non- Invest- Agri- Other Total grains Food food ment cultural Inputs Consumer Related Inputs Program Aid 135 4 16 68 27 57 307 General f.x. and ADO 73 38 84 200 25 146 566 DP & Free 4 10 54 44 4 29 145 Project Aid - - 4 47 - 1 52 Entrepot - - - 1 - - 1 Foreign Capital & Investment - - - 29 - - 29 Custom Declaration - 1 - 5 - 1 7 Sub-total 212 1 Oil Sector, Goods - - - - - 101 Oil Sector, Services a/ - - - - - - 65 Other Non-factor Services - - - - - 106 Investment Income - - - - - - 109 TOTL- a/ Including oil sector debt service payments. Source: Bank Indonesia Table 3.3 : Imports by Commodity Group and Type of Financing 1970/71 (in millions of US dollars) Food- Other Non- Invest- Agricul- Other Total grains Food food ment tural Inputs Consumer Related Inputs Program Aid 125 4 19 85 9 49 291 General f.x. and ADO 21 45 96 249 15 155 581 DP & Free 2 - 20 10 - 8 40 Project Aid - 8 100 - 2 110 Entrepot 1 2 4 11 18 Foreign Capital & Investment - 2 66 - 4 72 Custom Declaration 1 - - 4 - 2 7 Merchant L/0 - 3 38 42 2 16 101 Sub-total 149 53 185 560 26 247 1,220 Oil Sector, Goods - - - - - 115 Oil Sector, Services ! 75 Other Non-factor Services 119 Investment Incoie 134 TOTAL ,63 a/ Including oil sector debt service payments. Source: Bank Indonesia Table 3.4: Aid Commitments and Disbursements (L/C's opened), 1968-1970/71 by Years of Commitment (In Millions of US Dollars) Program Aid Specific Project Aid Commitments Total BE Grants/ PL-h80 PL-h80 PL-48o Other 7ood Total Program Pre-1967 Commitment Commitment Commitment Project Total Loans Non-?ood Rice Wheat Aid Aid 1968 1969 1970/71 Aid Aid 1968 1 Opening Pipeline 23.5 - - - - 23.5 113.1 - - - 113.1 136.6 Commitments 14o.5 43.4 64.3 35.7 10.8 294.7 - 67.h - - 67.4 362.1 Disbursements 114.2 36.2 63.7 25.3 2.h 241.8 20.1 - - - 20.1 261.9 1969/70 (15 months) Upening 1ipeline h9.8 7.2 0.6 10.4 8.4 76.h 93.0 67.4 - - 160. 236.8 Commitments 148.8 h6.4 74.2 26.5 24.5 320.4 - - 129.7 - 129.7 450.1 Disbursements 155.9 45.9 74.8 30.3 31.9 338.8 18.6 41.9 19.hI - 79.9 418.7 1970/71 (12 months) Opening Pipeline 42.7 7.7 - 6.6 1.0 58.0 714.4 25.5 110.3 - 210.2 268.2 Commitments 141.1 48.6 58.6 50.1 42.7 41.1 - - - 255.5 255.5 596.6 Disbursements 137.8 27.1 58.6 27.3 1O.4 291.2 10.1 20.1 63.6 16.2 110.0 401.2 1972 Opening Pipeline 46.0 29.2 - 29.L 3.3 107.9 6h.3 5.4 46.7 239.3 355.7 463.6 Source: Bank Indonesia and Information from Donor Countries. Table 3.5: General and Specific Project Commitments, 1968 - 1970/71 (in millions of US dollars) General Specific Carry-over General Specific Carry-over General Specific Carry-over Commit- Project of General Commit- Project of General Commit- Project of General ments Commit'ts Commit'ts ments Commit'ts Commit'ts ments Commit'ts CommitIts 1968 1968 per 31/12/68 1969 1969 per 31/12/69 1970/71 1970/71 per 31/3/71 A.D.B. - - - 3.4 3.4 - 20.2 20.2 - Australia 2.5 2.5 - 5.1 5.1 - 16.4 11.4 5.0 Belgium - - - 0.8 0.8 - 1.7 1.7 - Canada - 0.8 0.2 0.6 0.7 1.3 - Denmark - - - A.0 4.0 - - - - Prance 4.3 4.3 - 6.3 - 6.3 7.2 6.3 7.2 Germany 10.5 - 10.5 16.4 7.9 19.0 18.8 14.6 23.2 I.D.A. 7.0 7.0 - 59.0 59.0 - 104.9 104.9 - Japan 40.0 4.6 35.4 55.0 16.8 73.6 60.6 39.3 94.9 Netherlands 5.6 5.6 - 41.3 25.2 16.1 12.0 7.6 20.5 United Kingdom 0.9 0.9 - 1.0 1.0 - 1.8 1.8 - United States - - - 29.1 6.3 22.8 75.6 51.4 47.0 Total 70.8 24.9 45.9 222.2 129.7 138.4 1.9 260.5 197.8 Specific Commitments (cumulative) 24.9 154.6 [15.1 Table 3.6: Specific Project Commitments and Disbursements of Project Aid (L/C's opened), 1968-1970/71 (in Yllions of US Dollars) Pipeline Commitments Disbursements Disbursements Pipeline Commitments Disbursement Pipelin Dec. 31, '68 in 1969 in 1969 1st quarter'70 3/31/70 in 1970/71 in 1970/71- 3/31/71tJ Pre-1967 Commitments 93.0 -- 15.3 3.3 74.4 -- 10.1 64.3 Australia 2.5 5.1 3.9 1.0 2.7 11.4 3.9 10.2 Belgium -- 0.8 -- 0.8 -- 1.7 -- 1.7 Canada -- 0.2 -- -- 0.2 1.3 0.6 0.9 Denmark -- . 0.6 -- 3.- 3.3 0.1 France 4.3 -- 4.3 -- -- 6.3 6.0 0.3 Germany 10.5 7.9 7.5 -- 10.9 14.6 3.1 22.h Japan 36.4 16.8 16.2 2.4 34.6 39.3 31.4 42.5 Netherlands 5.6 25.2 20.1 0.2 10.5 7.6 7.1 11.0 United Kingdom 0.9 1.0 0.9 1.0 -- 1.8 1.8 -- United States -- 6.3 6.3 46.4 6.1 46.6 I.D.A. 7.0 59.0 2.3 -- 63.7 o.9 35.6 133.0 A.D.B. -- 3.4 0.2 -- 3.2 20.2 1.0 22.h Total 160.2 129.7 71.3 8.7 209.9 255.5 110.0 355.4 1/ Disbursements are in arrival terms 2/ Estimates. Source: BAPPENA3 Table 3.7: Commitments and Disbursements of Program Aid, 1968-1970/71 (In i-1llions of Us Dollars) Commitments ,Pipeline Commitments Disbursements Pipeline 1969/ Disbursements Pipeline Dommitments DiaburseLants Pipelinq 31 Dec.'67 1968 68 8 31 Dec.'68 March'70 '69/March '70 31 March'70 1970/71 1970/ 71 - 31 Mar. '71 1. BE grants and loans AnstraliA 0.3 8.2 2.2 6.3 6.1 6.7 5.7 7.3 Belgium - 0.4 0.3 0.1 1.2 1.4 -0.1 1.7 Canada - - - - - - - 2.0 Prance 1.5 6.9 1.5 6.9 6.3 7.9 5.3 6.1 Germany 3.6 12.5 15.1 1.0 13.7 11.2 3.5 15.0 India 0.5 - 0.2 0.3 - 0.1 0.2 - Japan 7.8 65.0 61.1 11.7 55.0 64.8 1.9 55.0 Netherlands 0.2 19.4 17.1 2.5 18.1 19.3 1.3 16.2 New Zeaand - - - - - - - 0.6 United Kingdom 1.2 3.1 2.2 2.1 4.4 6.4 0.1 7.2 United States 8.4 25.0 14.5 18. 44.0 38.1 24.8 30- Total 23.5 140.5 114.2 49.8 148.8 155.9 42.7 141.1 137.8 46.0 2. PL 480 loana Non-food - 43.4 36.2 7.2 46.4 45.9 7.7 48.6 27.1 29.2 Rice - 64.3 63.7 0.6 74.2 74.8 - 58.6 58.6 - Wheat/bulgur 3 25-3 10.4 26.5 0. 6.6 50.1 27 29.4 Total - 143.4 125.2 18.2 147.1 151.0 14.3 157.3 113.0 58.6 3. Other food aid Australia - 3.8 2.3 1.5 6.6 7.7 0.4 6.5 Belgium - - - - 0.9 0.9 - 1.1 Canada - 0.8 0.1 0.7 1.9 2.6 - 3.0 France - - - - 1.6 1.6 - 2.0 Germany - - - - 1.9 1.8 0.1 1.7 Italy - - - - 0.4 0.4 - 0.9 Japan - 5.0 - 5.0 10.0 15.0 - 24.4 Netherlands - 1.2 1.9 -0.7 1.7 United Kingdom - 1.2 - 1.2 1.2 1.4 Total - 10.8 2.4 8.4 24.5 31.9 1.0 42.7 40.4 3.3 Grand Total 23.5 294.7 241.8 76.4 320.4 338.8 58.0 341.1 291.2 107.9 a/ Estimates / Commitents of U3$29.2 million for non-food and USi29.4 million for wheat/,bulgu rapected to be signed by the end of March, are imoladed in these figuea Sources Bank Iodnesia  Table 5.1: Routine Government Receipts 1970/71 and 1971/72 (in billions of rupiahs) -1970/71 1971/72 November February Budget (Estimate) (Estimate) Taxes on Income 120.2 121.4 143.6 Income Tax 13.7 13.3 15.7 Corporate Tax (Non-Oil) 18.8 20.6 21.6 Withhblding Tax 17.6 18.8 19.1- Corporate Tax (Oil) 69.9 68.5 87.2 Other 0.2 0.2 -- Domestic Consumption Taxes 91.4 90.1 111.2 Sales Tax 18.0 16.9 20.7 Excises 40.1 37.6 45.6 a, Other Oil Revenues 28.8 31.5 39.1 Mistellaneous 4.5 4.1 5.8 Taxes on International Trade 132.1 123.2 16 Import Duties 83.1 75.0 98.6 Sales Tax on Imports 25.0 22.9 29.6 Export Tax 24.0 25.3 28.7 Non-tax Revenues 2.6 .2 A. TOTAL 346.3 344.4 415.9 g/ These items are likely to realize more revenues than are indicated by the budgeted amounts. Source: Ministry of Finance. Table .2: Routine Government Expenditures 1970/71 and 1971/72 (in billions of rupiahs) 1970/71 November February 1971/72 (Estimate) (Estimate) Bdget Personnel Expenditures 1351 137.5 165.9 Wages and Salaries 71.4 71.4 101.6 Rice Allowances 32.3 32.2 33.0 Other Allowances 13.0 13.0 12.1 Other Personnel Expenditures 13.6 16.1 14.2 External Personnel Expenditures 4.8 4.8 5.0 Material Expenditures 63.7 67.2 Domestic 53.4 50.7 59.0 Internal 10.3 8.2 8.2 Subsidies to Autonomous Regions 75.1 76.5 87.6 West Iran 10.0 10.1 10.6 Other Regions 45.1 46.1 56.2 Former ADO Tax 20.0 20.3 20.8 Debt Service Payments 26.1 26.1 37.2 Internal 2.5 2.5 8.4 External 23.6 23.6 28.8 Other Routine Expenditures 10.7 11.7 6.2 General Election 10.0 11.2 4.7 Previous Year's Expenditures 0.7 0.5 1.5 Total Routine Expenditures 310.7 310.7 364.1 Source: Ministry of Finance Table 5.3: Rupiah Expenditures of the Development Budget 1970/1971 (in millions of rupiahs) Original Expenditure Balance Alloca- Budget April-Feb. tions 1971/72 1. Consultative Assembly 133 38 95 133 2. Gotong Rojong House 667 436 231 667 3. Supreme Advisory Council 27 11 16 27 4. State Comptrolling Body 67 50 17 86 5. Supreme Court 55 39 16 35 6. Office of Attorney General 266 187 79 266 7. Office of the President S4 33 21 S4 8. Cabinet Secretariat 721 319 402 548 9. Non departmental Agencies 744 h63 281 744 10. Department of Home Affairs 1,494 961 533 1,344 11. Department of Foreign Affairs 378 301 77 260 12. Department of Justice 941 508 433 1,041 13. Department of Information 1,006 582 424 1,006 lb. Department of Finance 1,600 978 622 1,680 15. Department of Trade 522 161 361 572 16. Department of Agriculture 7,945 5,478 2,467 16,858 17. Department of Industry 2,073 1,424 649 2,,073 18. Department of Mining 1,002 626 376 1,102 19. Department of Public Works 46,000 36,326 9,674 52,754 20. Department of Communication 11,03 7,015 4,028 16,255 21. Department of Education 5,850 3,629 2,221 6,650 22. Department of Health &,h00 3,239 1,161 4,700 23. Department of Religion 1,100 710 390 14100 2h. Department of Manpower 422 348 74 572 25. Department of Social Affairs 320 255 65 370 26. Department of Transmigration 1,360 1,184 176 1,660 27. Department of Defence 4,500 n.a. n.a. 5,000 28. Department of Accounting 22,638 13,786 8,852 39.360 Division - Financing through Banks (5,000) - District and Village Program (11,290) - Reallocation of Personnel (100) - West Irian Development (3,500) - Others (2,748) T 0 TAL 117,328 79,087 33/,71 154,917 a/ Exludes Defence expenditure Source: Ministry of Finance  Table 6.1: Mledium-Term Credits, 1969-70 (in billions of runiahs) Disburserients by Disbursements by Sector Sharo of iinncing Public Private Total Bank Govern- State Aporoved Sector Sector Disbursement Ind. ment Banks 1.969 A-ril 4.6 1.3 1.5 2.8 2.8 - May 5.1 1.3 2.2 3.5 3.5 - June 5.4 1.3 2.3 3.6 3.6 - July 7.6 1.4 2.4 3.8 3.6 0.2 - August 9.6 1.6 2.6 4.2 3.9 0.3 - September 11.3 2.1 2.5 4.6 4.3 0.3 - October 13.6 3.2 3.0 6.2 4.9 0.8 0.5 .November 21.6 4.4 3. 8.0 5.4 2.1 0.5 December 27.2 4.3 4.9 9.2 5.9 2.6 0.7 1970 January 27.3 4.8 6.5 11.3 6.7 3.6 1.0 February 28.9 5.1 8.0 13.1 7.6 4.3 1.2 March. 31.6 5.5 11.1 16.6 9.1 5.5 2.0 April 34.8 7.1 13.2 20.3 10.6 7.2 2.5 May 37.7 7.1 14.9 22.0 10.8 7.4 3.8 June 41.8 7.0 17.3 24.3 13.5 7.7 3.1 July 43.7 7.1 21.3 28.4 14.7 8.4 5.3 August 46.2 7.7 22.7 30.3 15.8 8.7 5.8 September 50.2 7.8 25.3 33.1 17.4 8.5 7.2 October 54.8 8.1 26.8 34.9 19.2 8.3 7.4 November 58.7 8.8 27.9 36.7 22.4 6.3 8.0 Source: Batk Indonesia  -'ablelO.1 : Projection of Private Foreign Investments (in millions of US dollars ) Sector 1971 1972 1973 l_74 1 Total Agriculture 3.3 5.5 7.2 5.2 3.8 25.0 Forestry 31.0 33.0 35.0 35.0 35.0 169.0 Fishery 3.0 3.2 2.5 2.0 2.0 12.7 Sub-total 22.2 .L .1 A 4. 48 206.7 Mining .and quarryng 140.5 172.0 158.0 158. 151. 0 780.o a) Hard pinerals *U/ *uM. 9 T b) OIJ - Production-sharing 20.0 38.0 .55.0 64.0 63.0 24o.0 - Contracts of iork 35.0 37.0 39.0 30.0 23.0 164.ci Manufacturing 77.0 22.1 98.7 103.9 110.4 482. a) Food, beverages, tobacco 15.0 9.0 12.0 14.0 15.0 65.0 b) Textile, wearing apparel, leather 18.5 27.0 18.0 20.0 22.0 105.5 c Wood & wood products 0.1 0.3 0.4 0.4 - 1.2 d Paper & paper products 1.5 2.5 2.5 1.0 0.5 8.0 e Chemicals, rubber & plastic products 20.0 22.0 26.0 27.0 27.0 122.0 f) Non-metallic mineral products 3.5 4.5 10.0 7.0 7.0 32.0 g Basic metals 0.2 0.4 0.8 1.5 0.9 3.8 h Fabricated metal products, machinery, & equipment 17.0 25.0 25.0 27.0 30.0 124.0 i) Other 1.2 2.0 4.0 6.0 8.0 21.2 Construction 5.0 11.0 14.0 17.0 18.0 65.0 Trade and hotels 1.6 2.5 3.5 3.1 2.7 13.4 Transport & communications 2.6 3.3 3.2 2.5 2.9 14.5 Social and other services 3.0 3.5 4.0 4.5 5.0 20.0 Total 267.0 326.7 326.1 331.7 330.8 1,582.3 ==nun a:= muna. Own= OO==O OMOOuuNSInM a/ Disbursements. Includes investment expenditures not registered with the Foreign Invest- ment Board and Bank Indonesia. 0/ Calculated by the mission on the basis of commitments specified in the contracts and on the basis of known planned investment programs. Source: ILata supplied by Bank Indonesia, Foreign Investment Board, and Department of Mining. Table 10.2: Approvals and Disbursements of Private Foreign Invebtment Proiects, 1967-1970 (in thousands of US dollars) Field of Activity a/ Number of Approval Disbursement Frojects 1967 1968 1969 1970 Total 1967 1968 1969 1970 Total- Agriculture, Forestry & Fishing 101 12,00 9395 277,.00 88704 473,59 661.60 2,890.62 14.931.69 34.292.27 52,785.18 - Agriculture 43 - 16,790 2,000 53,354 72,144 - 28.95 849.61 1,413.03 2,291.59 - Forestry 49 7,000 75,605 275,000 32,300 389,905 6c1.60 2,873.67 10,922.34 28,779.08 43,233.69 - Fishing 9 5,000 3,000 500 3,050 11,550 - - 3,159.74 4,100.1o 7,259.90 Mining & Quarrying q 76.500 82.000 304,707 3 463.507 2.50 904.29 3.229-20 7,692.98 1 - Metal Ore 7 76,500 82,000 304,527 - 463,027 2.50 904.29 3,229.20 7,691.67 11,827.66 - Other 2 - - 180 300 480 - - - 1.31 1.31 Manufacturing 184 27.969 49.613 74.620 133,260 285.462 814.17 10,076.49 23.098.44 45,504.34 79S9344 - Food 29 10,619 9,647 16,878 10,156 47,300 - 3,400.69 4,304.36 14,602.26 22,307.31 - Textile & Leather 19 - 841 33,550 24,250 58,641 - 387.83 2,241.19 9,552.86 12,181.88 - Wood & Wood Product 1 - - - 500 500 - - - - - - Paper & Paper Product 6 - - 750 3,400 4,150 - - 249.76 1,143.50 1,393.26 - Chemical & Rubber 62 15,700 11,189 14,098 25,574 66,561 640.81 1,782.27 4,888.25 7,324.94 14,636.27 - Non-metallic Mineral 6 - 2,778 900 31,500 35,173 - 260.36 576.20 897.46 1,734.02 - Basic Metal 4 - - - 4,500 4,500 - - - 52.34 52.34 - Metal Product 52 1,400 22,278 8,444 33,080 65,202 117.40 3,679.71 10,126.75 10,509.37 24,433.23 - Other 5 250 2,880 - 300 3,430 55.96 565.03 711.93 1,421.61 2,755.13 Construction 19 2.000 6.700 6,390 17.593 32.683 1,158.62 2,172.83 .535.17 6,688.62 Trade * Hotels 6 - 2_.L79Q 7L9 1.500 7027 - - 281.62 665.22 946.84 - 'holesale Trade 1 - - - 1,500 1,500 - - 267.66 267.66 - Hotels 5 - 2,730 2,797 - 5,527 - - 281.62 397.56 679.18 Transport & Communication 6 6.100 162 1.050 500 7.812 61.00 2,248.2 2,114.1 1562.32 5, 6 - Transport 5 - 162 1,050 500 1,712 - 44.19 191.53 1,216.49 1,452.21 - Communication 1 6,100 - - - 6,100 61.00 2,204.08 1,922.57 345.83 4,533.48 Community, Social & Personal Services 10 - 1,024 5.650 1430 8.104 180.98 549.58 2,308.12 3,038.68 - Social & Related Community 5 - 24 - 230 254 - - - 41.40 41.46 - Recreational & Cultural 5 - 1,000 5,650 1,200 7,850 - 180.98 549.58 2,266.66 2,997.22 TOTAL 124.569 237.624 672.714 243.287 1.278.194 1,539.27 17,468.27 46.377.46 95.560.42 160.945.42 Classification according to: "International Standard Industrial Classification of All Economic Activities" (Statistical Office of the United Nations, Stitistical-Papers, Series M, No. 4). b/ Intended capital included Indonesian share in the joint enterprises. Source: Foreign Investment Board Bank Indonesia, Foreign Department Nostro Administration Customs Administration Table 10.3: Projection of Private Domestic Investmentsa/ (in billions of rupiahs) 9 72 . 1974 Total Agriculture 0.70 1.40 1.45 2.00 2.30 7.85 Estates 3.00 7.50 12.00 14.00 14.00 50.50 Forestry 3.00 10.50 18.00 18.00 15.00 64.50 Fishery 0.30 0.40 0.85 0.87 1.00 3.42 Livestock 0.07 0.10 0.15 0.14 0.13 0.59 Sub-total 7.07 192 3245 35.01 32.43 126.86 Mining & quarrying 0.75 1.30 1.45 1.00 1.00 5.50 Manufacturing 21.00 32.00 65.00 75.00 90.00 283.00 Transoort, tourism and other services 5.50 6.50 7.50 8.00 8.00 35.50 Total 34.32 59.7Q 106.40 119.01 131.43 A50.86 a/ Disbursements Source: Calculated from basic data supplied by the Domestic Investment Board, BAPINDO and Bank Indonesia. Table 10.: APPROVALS -%OF PRIVATE DOMESTIC INVESTMENTS 1968 (Nov-Dec) 1969 1970 Sectors Number Foreign Total Manpower Number Foreign Total Manpower Number Foreign Total Manpower of Exchange Cost Required Echange Cost Exchange Cost Projects Cost (Bp.millilon) (S million) Agriculture - - - - 3 0.20/ 143.00 291 13 2.46 2,128.95 3,162 Estates 2 0.89 703.95 - 26 8.10 4,997.39 - 28 18.09 13,411.12 3,657 Forestry - - - - 9 10.97 5,078.85 5,360 32 29.23 12,651.55 26,503 Fishery 1 0.60 730.00 - 3 1.22 414.06 - 2 0.53 204.84 10 Liveetook - - - - 1 0.04 50.00 15 2 0.04 110.50 40 Sub-total 3 1.49 1,433.95 -- 42 20.52 10,683.30 5,666 77 50.35 17,116.96 33,372 Mining - - - - - - - - 2 2.01 1,394.67 676 Industry 4 1.46 567.72 - 95 64.49 26,151.07 - 209 113.69 59,757.30 29,064 Transportation - - - - 11 11.47 5,226.51 7,301 14 16.97 7,480.34 5,384 Real Estate - - - - 1 0.01 30.00 - 1 0.01 30.00 - Tourism - - - - 8 5.56 3,302.29 5,824 19 11.86 7,367.50 4,873 Infrastructure - - - - 3 2.01 1,347.51 - 3 2.01 1,347.56 156 Other - - - - - - TOTAL -_ 25 001.67 - 160 104.08 46,740.73 18.791 22 196.89 105,984.32 73.625 / Relates to projects recomended for apvroval by the Sub-committee on Domestic Investment Board to the Ministry of Finance. Source: Domestic Investment Board.