ECONOMIC GROWTH AND STATE FINANCE

After an average annual rate of between 5% and 7% during a long-term growth in the last two decades, Indonesia has been hard hit during the recent wave of the Asian monetary crisis. With an economic growth of 4.7% in 1997, the 1998/99 State Budget envisages a minus 12% economic growth with an inflation of 66%, which gradually developed into an economic crisis. The country's economic order and national financial institutions proved unable to with-stand the violent tremors against the nation's economic foundations. It is no exaggeration to say that the achievements of the national development of the last three decades have been wiped out by a crisis that took place for only several months, and worsened when the local currency lost its value. The Government was, in fact, caught by surprise with the unbelievable large private sector debts which had accumulated in the last five years.

The Central Bureau of Statistics predicted that the country's GDP would shrink by 10.1% this year based on 1993 constant prices. The construction sector was the worst hit by the recession, contracting by 27.16%. The manufacturing sector followed with 18.58%, hotels and restaurants 14.38%, financial services 11.1%, mining 9.65%, other services 3.7% and transportation and communication 2.5%. Only agriculture and utilities (electricity, gas and clean water) booked a positive growth during the first quarter of 1998, respectively by 28.47% and 7.1%.

It is also reported that the country's month-by-month inflation rate rose 05.24% in May, bringing the total increase in the consumer price index to 40.06% in the first five months of 1998. Inflation is predicted to reach 80% to 85% this year. The main driver of inflation during the first five months of this year was the prolonged monetary crisis, compounded by bad farm harvests and increasing fuel prices.

Food prices rose by 3.90%, processed food and cigarette prices 4.00%, housing prices increased 4.14%, clothing 4.53%, health 2.4%, education and recreation 1.41%, transportation and communication 17.25%.

In international trade Indonesia noted a surplus of US$5.09 billion during the first quarter of this year, with exports reaching US$12.29 billion and imports US$7.2 billion. Exports declined by 0.9% during the same period to US$12.19 billion, with non-oil exports rising 9.5% to US$10.02 billion and oil and gas exports falling 30.17% to US$2.27 billion. In 1997/98 the country's total exports reached US$56.2 billion with non-oil exports accounting for US$45.9 billion and oil and gas exports US$10.2 billion. At the same time imports accounted for US$38.6 billion and oil and gas imports US$4.1 billion.

To recover the deteriorating economic situation the Indonesian Government has launched and implemented all economic reform programs, including a 50-point program of reforms and its extended arrangement as agreed with the International Monetary Fund (IMF) that offered US$43 billion in loans. In addition, it also adopted a strategy to: (1) stabilize the rupiah at a level more in line with the underlying strength of the Indonesian economy, including a tight monetary policy, (II) strengthen and accelerate its strategy for restructuring the banking system; (III) strengthen implementation of the structural reforms that will create the foundations for a more efficient and competitive economy; (IV) provide a framework for comprehensively addressing the debt problems of private corporations; and (V) restore trade financing to a normal basis, allowing domestic production and especially the export sector to recover.

It is expected that the Government's bold policy program will be reinforced by financial support from the international community, including trade financing and the provision of food and medical aid.

Furthermore, another agreement was signed with the IMF, the fourth in nine months of 1998, promising yet more reforms in a bid to arrest the country's economic turmoil. The latest letter of intent is far less restrictive than previous ones, allowing the government to maintain subsidies for food, fuel, electricity and other spending on "social safety net" programs to help the poor cope with the crisis.

The high interest rate policy will be continued to ensure the quick reduction of inflation and the strengthening of the rupiah.