Oil Price Slump Forcing Indonesia to Diversify

Indonesia, hit hard by the recent drop in oil and gas prices, is scrambling to boost exports of other products.

With a population of 167 million, many desperately poor, the Southeast Asian archipelago nation has long depended on revenue from oil and gas for development income.

Last year’s decline in oil prices triggered a 30% drop in the country’s total foreign exchange earnings and brought oil and gas income to less than 50% of government income for the first time in 13 years.

The drop in income forced the government to devalue its currency by 31%, cut its budget and increase borrowing.

Debt service on foreign loans rose to almost 40% of export income. Inflation-adjusted gross domestic product fell 6% in 1986, following a 3% decline in 1985.

Because of the low energy prices, fewer than half of the 251 exploration wells planned for 1986 were actually drilled. Petroleum company sources said only 111 wells are planned for 1987, although the number could rise if prices recover.

“The slowdown in exploration means reserves are not being replaced fast enough to keep up with production,” one source said. “With internal demand increasing, it might not be too long before there just isn’t much of a surplus to export.”

Rising unemployment and a cap on civil service and military salaries triggered public complaints about the economy during the April national elections.

In a surprising display on the last day of the campaign, more than a million supporters of the non-government Democratic Party of Indonesia, mostly young people, paraded through Jakarta. But President Suharto, with tight control of the political parties, the election machinery and the media, engineered peaceful polling and an overwhelming victory for the government party, Golongan Karya, which roughly translates as “functional groups”.

In the long term, however, analysts said stability depends on diversifying and expanding the economy.

Deregulation Under Way

“We are making efforts to shift our reliance primarily to the non-oil and gas sector for our state and foreign exchange earnings,” Suharto said in a speech.

Unfortunately, prices for most of Indonesia’s other commodity exports--palm oil, rubber and tin--also are depressed. But new tin and rubber pricing agreements offer hope for gradual improvements.

The government has begun to remove layers of protection and control that have hampered the development of export manufacturing.

“Where once we regulated, now we will deregulate; where once we added layers of bureaucracy, now we will streamline,” said J. B. Sumarlin, minister of National Development Planning.

In January, the government lifted non-tariff barriers on 100 items, lowered or cut tariffs on 150 others, removed quota restrictions on 140 textile and steel products, and lifted production limits on some manufacturers.

“Additional reforms are almost certainly inevitable,” Sumarlin said.

The country’s main manufactured exports are plywood and textiles, but with its vast supply of cheap and trainable labor, inexpensive energy supplies, natural resources and core of entrepreneurs, Indonesia should have a wide variety of products that could compete on world markets. Manufacturing has been held back by what is called the high-cost economy of monopolies, limited licenses, government regulation and corruption.

The cumbersome system of import monopolies and licenses was inherited in part from the Dutch colonialists, who ceded control in late 1949 after four years of fighting Indonesian nationalists. Corruption, which had plagued the colonial regime, carried over more blatantly under the first Indonesian president, Sukarno, and expanded after Suharto wrested power from him in 1966.

Business Favors Change

One Western embassy official estimated that the monopoly system and its corruption and influence peddling costs Indonesia between one half and a full percentage point of growth annually.

Business executives agreed that more changes are needed.

“We welcome the end to over-regulation, of course, but that’s only part of the problem,” a Western manager said. “The bureaucracy is just too slow, unresponsive and corrupt.”

“We cannot compete on world markets because of our high-cost economy--a result of corruption,” said former Mines and Energy Minister Slamat Bratanata, an independent critic of the government. “As long as we cannot compete, then we are dependent on oil.”

With its 167 million people, Indonesia is the world’s fifth-most populous country. Population growth that has averaged 2.3% during the past decade adds more than 2 million job-seekers to the work force each year.