Survey of recent developments

Indonesia continued to struggle with institutional change and political uncertainty in recent months. President Abdurrahman Wahid delegated some responsibilities to Vice President Megawati Sukarnoputri, but subsequently appointed a new cabinet that consisted primarily of people close to him, making many wonder if he had really given up any power. The killing of UN personnel in Atambua, West Timer, led to renewed pressure on the government to rein in the militias operating there. The president also tried to increase his control over the military, the police and the judiciary, with mixed results. The economy continued to recover, with the annualised growth rate in the first half of 2000 reaching 4.6%. This growth was fuelled largely by exports and fixed investment, which markedly increased their shares of real GDP. Consumption also remained robust. If the recovery of fixed investment can be sustained, the economy could grow 5% or more for the year. There is some concern that the money supply is expanding faster than desired, and inflation accelerated in the third quarter. The fuel price increase in October will also lead to higher prices, but the annual inflation rate is likely to be 8% or less. The large domestic debt burden incurred in recapitalising the banks will raise expenditures significantly, and increased revenue sharing will reduce central government revenues from the 2000 and 2001 budgets. Finding the finance for related deficits is the major macroeconomic challenge for the government in the next few years. Rapid growth of office and electrical machinery exports in the first half of 2000 signals a notable structural change. These exports originate largely from foreign multinationals (MNCs), and their growth indicates that Indonesia is being integrated into the MNC networks that dominate these industries in Southeast Asia.