RESTRICTEDWORLD  TRADE
ORGANIZATIONWT/TPR/S/117
28 May 2003
(03-2742)
Trade Policy Review Body
TRADE POLICY REVIEW
INDONESIA
Report by the Secretariat
This report, prepared for the fourth Trade Policy Review of Indonesia, has been
drawn up by the WTO Secretariat on its own responsibility.  The Secretariat has,
as required by the Agreement establishing the Trade Policy Review Mechanism
(Annex 3 of the Marrakesh Agreement Establishing the World Trade
Organization), sought clarification from  the Government of Indonesia on its
trade policies and practices.  Parts of Chapters II, III and IV are without detailed
comment from the authorities.
Any technical questions arising from this report may be addressed to
Mr. Sergios Stamnas (tel. 022 739 5382) and Mr. Michael Daly
(tel. 022 739 5077).
Document WT/TPR/G/117 contains the policy statement submitted by the
Government of Indonesia.
Note: This report is subject to restricted circulation and press embargo until the end of the meeting
of the Trade Policy Review Body on Indonesia.Indonesia WT/TPR/S/117
Page iii
CONTENTS
Page
SUMMARY OBSERVATIONS vii
(1) E CONOMIC ENVIRONMENT vii
(2) T RADE POLICY FRAMEWORK viii
(3) T RADE POLICY DEVELOPMENTS viii
(4) S ECTORAL POLICY DEVELOPMENTS xi
(5) P ROSPECTS xiii
I. ECONOMIC ENVIRONMENT 1
(1) I NTRODUCTION 1
(2) R ECENT ECONOMIC DEVELOPMENTS 2
(i) Growth and employment 2
(ii) Stabilization policies 4(iii) Balance of payments and external debt 7(iv) Structural reforms 8
(3) D
EVELOPMENTS IN TRADE 10
(i) Trade in goods 10
(ii) Trade in services 13
(4) F OREIGN INVESTMENT PATTERNS 13
(5) O UTLOOK 15
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES 16
(1) O VERVIEW 16
(2) G ENERAL CONSTITUTIONAL AND INSTITUTIONAL FRAMEWORK 16
(i) Regional decentralization 17
(3) S TRUCTURE OF TRADE POLICY FORMULATION 19
(i) Executive branches of government 19(ii) Advisory bodies 19
(4) T
RADE POLICY OBJECTIVES 19
(i) General trade policy objectives 19
(ii) Sectoral trade policy objectives 20(iii) The WTO Agenda 20
(5) T
RADE LAWS AND REGULATIONS 20
(6) T RADE AGREEMENTS AND ARRANGEMENTS 21
(i) Multilateral agreements 21
(ii) Preferential, regional, and bilateral arrangements 23
(7) T RADE DISPUTES AND CONSULTATIONS 26
(i) Dispute settlement under the GATT/WTO 26(ii) Other 27
(8) F
OREIGN INVESTMENT REGIME 27
(i) Recent performance and developments 27WT/TPR/S/117 Trade Policy Review
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Page
III. TRADE POLICIES AND PRACTICES BY MEASURE 32
(1) I NTRODUCTION 32
(2) M EASURES DIRECTLY AFFECTING IMPORTS 33
(i) Registration and documentation requirements 33
(ii) Tariffs 34(iii) Customs valuation 42(iv) Other levies and charges 43
(v) Import prohibitions, restrictions, and licensing 43
(vi) State trading 44(vii) Government procurement 46(viii) Countertrade 48(ix) Local-content requirements 48
(x) Contingency measures 49
(xi) Standards and other technical requirements 51
(3) M
EASURES DIRECTLY AFFECTING EXPORTS 57
(i) Registration and documentation 57(ii) Export prohibitions, restrictions, and licensing 57
(iii) Export taxes 58(iv) Export check (benchmark) prices 59(v) Export assistance 59
(4) M
EASURES AFFECTING PRODUCTION AND TRADE 61
(i) Taxation 61
(ii) Production assistance 63(iii) Competition and consumer policy 64(iv) Intellectual property rights 65(v) Other measures (environmental) 70
IV. TRADE POLICIES BY SECTOR 72
(1) I
NTRODUCTION 72
(2) A GRICULTURE AND FORESTRY 73
(i) Features 73
(ii) Main policy developments 74(iii) Selected items 77(iv) Forestry 79
(3) M
INING AND ENERGY 80
(i) Mining 80
(ii) Energy 81
(4) M ANUFACTURING 82
(i) Textiles, clothing, and leather 83
(ii) Automotive 83(iii) Aerospace 84
(5) S
ERVICES 85
(i) Financial services 85
(ii) Communications 92(iii) Transportation 95(iv) Tourism 97
REFERENCES 99
APPENDIX TABLES 103Indonesia WT/TPR/S/117
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Page
CHARTS
I. ECONOMIC ENVIRONMENT
I.1 Product composition of merchandise trade, 1998 and 2001 11
I.2 Direction of merchandise trade, 1998 and 2001 12
III. TRADE POLICIES AND PRACTICES BY MESURE
III.1 Distribution of MFN tariff rates, 1998 and 2002 37
III.2 Average applied MFN and final bound tariff rates, by HS section, 1998 and 2002 39III.3 Share of customs duties collection in total import value and indirect tax revenue, 1998-03 40III.4 Tariff escalation by 2-digit ISIC industry, 1998 and 2002 41III.5 Number of SOEs by sector, 1998 46
III.6 Anti-dumping cases, January 1998-June 2002 50
IV. TRADE POLICIES BY SECTOR
IV.1 Tariff averages by 2-digit ISIC category, 1998 and 2002 76
IV.2 Interest rates on credit and deposit, 1997-02 90
TABLES
I. ECONOMIC ENVIRONMENT
I.1 Main economic and social indicators 2
I.2 Selected macroeconomic indicators, 1997-02 3I.3 Central government finances, 1997-02 5I.4 Approved foreign direct investment by sector, 1997-02 14I.5 Approved foreign direct investment by source, 1997-01 14
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES
II.1 Status of notification requirements to the WTO, as at February 2003 22
II.2 Involvement in the WTO dispute settlement mechanism, as at February 2003 27II.3 Investment negative list, as from 2000 29
III. TRADE POLICIES AND PRACTICES BY MESURE
III.1 Structure of MFN tariffs in Indonesia, 1998, 2002 and 2005 35
III.2 State involvement in the economy, 2000 44
III.3 Government procurement thresholds 47III.4 Mandatory SNIs in industry and trade, 2002 52III.5 Structure of direct and indirect tax revenue, 1997-03 61III.6 Environmental treaties to which Indonesia is a party 70
IV. TRADE POLICIES BY SECTOR
IV.1 Sectoral shares in GDP, employment and exports 74
IV.2 Market price support and de minimis  for rice, 1998-02 78
IV.3 IBRA equity stakes in joint-recap and taken over banks 87IV.4 IMF Assessment on Indonesia's compliance of 25 Basel core principles (CPs) 90WT/TPR/S/117 Trade Policy Review
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APPENDIX TABLES
III. TRADE POLICIES AND PRACTICES BY MESURE
AIII.1 Tariff escalation and tariff ranges, 1998 and 2002 105
AIII.2 Anti-dumping cases by Indonesia, January 1998-June 2002 108
IV. TRADE POLICIES BY SECTOR
AIV.1 Indonesia's tariff by ISIC category, 1998 and 2002 109Indonesia WT/TPR/S/117
Page vii
SUMMARY OBSERVATIONS
1. Since its last Trade Policy Review in
1998, Indonesia has undergone considerable
economic, political, and social change in the
aftermath of the severe 1997 financial andeconomic crisis.  It has implemented major
trade, structural, and macro policy reforms.
These reforms, not yet complete and relatively
painful for poorer households, have
successfully stabilized the economy andfostered economic growth.  
Major democratic
reforms together with rapid moves to
decentralize government and enhance regional
autonomy have also had an important impact
on the economy.
2. Despite noticeable improvements, the
economy remains fragile, burdened by a large
public debt overhang, fiscal pressures, and as
yet somewhat weak economic governance,
institutions and rule of law.  Recent external
and internal developments, such as the global
economic downturn and the Bali incident in
October 2002, have also hit the economy hard,
depressing key export markets, subduing
tourism, and heavily reducing foreign
investment on which the economy critically
depends.  Confronted by these economicchallenges, the Government has renewed its
efforts to accelerate structural and macro
reforms.
(1) E
CONOMIC ENVIRONMENT
3. Indonesia's economic recovery has
slowed since 2000 when real GDP growth was
4.9%;  however, after falling to 3.4% in 2001
it rose to 3.7% in 2002.  Growth has been
driven mainly by consumption, financed by
credit and rising minimum wages.  Thesomewhat subdued growth since 2000 reflects
adverse macroeconomic developments,
unresolved structural economic problems, and
high domestic risk, which hampered
production and investment.  Macroeconomic
conditions seem to have stabilized,
underpinned by fiscal consolidation.  Budgetdeficits widened from 1.6% to 2.7% in 2001,
but fell to 1.7% in 2002.  Inflation peaked atalmost 12% in 2002, and the rupiah has
stabilized and even strengthened.  Monetary
policy is centred on a mixture of monetary and
inflation targets adopted since 1999.
Substantial international reserves, providing
almost 11-months import cover in 2002, reflectsizeable current account surpluses, which
have generally offset large capital account
deficits.  Investment, especially foreign, has
fared badly.
4. Growth, and hence 
continued efforts
to alleviate poverty, will require further trade
and other structural reforms, including
strengthened governance and institutions.
Also, wage rises need to reflect productivity
improvements to help keep exports oftraditional labour-intensive industries
competitive and to curb rising unemployment.
The Government plans to develop a national
poverty reduction strategy by 2004, focused on
pro-growth and development policies,
including trade liberalization.
5. Trade as a share of GDP fell from
35.1% in 2000 to 27% in 2002;  however,
foreign trade patterns have hardly changed.
Indonesia is heavily dependent on
manufactured/petroleum exports and
manufactured imports.  Most merchandisetrade is with East Asian countries, especially
Japan and the Republic of Korea.  Singapore
remains by far Indonesia’s main ASEAN
trading partner.
6. A new National Investment Team is to
help restore a climate conducive to
investment;  this is urgently needed if
Indonesia is to attract foreign capital and thus
resume robust growth.  Although relatively
open, investment procedures are beingstreamlined, including the operation of the
Investment Coordinating Board, and legal
provisions made more transparent.  A new
investment law based on national treatment is
to replace the 1967 legislation in 2003.
However, uncertainty over the devolution of
authority to approve non-oil investment andimpose regional taxes under decentralizationWT/TPR/S/117 Trade Policy Review
Page viii
plans has seemingly reduced investor
confidence.
(2) TRADE POLICY FRAMEWORK
7. Indonesia has implemented trade and
other structural reforms mainly unilaterally,
as key components of its structural reformprogramme, but also in line with multilateral
commitments.  Unilateral reforms
substantially exceed WTO obligations in some
key areas, such as financial services.
However, there have been signs recently ofpolicy changes affecting  a few sensitive areas
(such as rice, sugar, and steel), which may
reflect a more protectionist stance.
8. Despite major political and
administrative changes, includingdecentralization, trade policy formulation is
still the responsibility of the Ministry of Trade
and Industry and has changed little since the
previous Review.  Greater transparency and
public scrutiny of trade policies is needed,
especially in sensitive sectors, where trade
policy seems to be set on a more ad hoc basis.
9. The much-awaited legislation
establishing the Anti-Corruption Commission
was passed in November, and significant state
divestment occurred in banking and
telecommunications.  Further amendments tobankruptcy provisions are envisaged in 2003.
In this context it might well be necessary to
reinforce many key structural reforms aimed
at strengthening the rule of law need to be
reinforced, including trade and businesslegislation, improving the commercial
environment, corporate and economic
governance, and building enforcement
institutions, such as commercial courts.  The
limited revisions to the bankruptcy legislationin 1998 and the establishment of the
Commercial Court failed, for example, to
restore confidence in the legal system and
provide necessary security for creditors.
Divestment of state entities, another reform
priority, has also lagged.  However, some
reforms seem to have accelerated since late2002.10. Indonesia's regional trade
liberalization is limited to the ASEAN Free
Trade Area (AFTA).  Indonesia (together with
the other five original ASEAN members) has
agreed to accelerate the phase-in of a
maximum 5% Common Effective PreferentialTariff (CEPT) by end 2003;  at end 2002, 99%
of Indonesian tariff lines were covered, with
an average tariff of 4%.  Indonesia no longer
excludes sensitive or other products from the
CEPT.
11. While committed to the multilateral
trading system, Indonesia wishes to accelerate
regional integration.  It is actively pursuing
preferential trading arrangements, through
ASEAN, which has agreed to establish anASEAN-China Free Trade Area within
ten years, and to examine the formation of an
East Asian Free Trade Area (ASEAN+3, with
China, Japan, and Korea).  As an APEC
member, Indonesia also remains committed to
the voluntary Bogor Goals of achieving
comprehensive, non-discriminatory open tradeand investment by 2020.  It also wishes to
establish comprehensive bilateral trading
arrangements with major trading partners,
such as Canada, Chile, Japan, and the
United States.
(3) T
RADE POLICY DEVELOPMENTS
12. The tariff is increasingly becoming
Indonesia's main trade policy instrument.  The
average applied MFN tariff has declined from
9.5% in 1998 to 7.2% in 2002, reflectingmainly unilateral reductions.  Some 93% of
rates are bound, but there remains a large gap
between bound and applied rates
(30.4 percentage points, on average)
imparting a degree of unpredictability to thetariff.  Agricultural tariff averages (8.4%)
slightly exceed industrial levels (7.2%).  While
most MFN tariffs (83%) are 10% or below,
relatively high rates (of up to 170%) apply
mainly to certain drinks and transport
equipment.  Current applied tariffs exceed
final bound rates on 41 items, mainlyalcoholic beverages.  Tariff dispersion has
fallen overall, but escalation exists for finalIndonesia WT/TPR/S/117
Page ix
products, especially for food, beverages, and
tobacco, and wood and furniture.
13. Almost all applied rates are
ad valorem, thereby making the tariff more
transparent (and possibly less distorting).
However, the Government has on occasion, asin the cases of rice and sugar, replaced
ad valorem with specific duties, possibly
concealing higher tariff protection.  Specific
duties on sugar were seemingly raised in late
2002.  Although few, such rises constitutespecial treatment for sensitive sectors.  There
are no tariff quotas.
14. Custom clearance procedures and
computerized documentation requirements
have facilitated imports and exports.Registration of importers has remained a
major requirement.  Indonesia implemented
the WTO Customs Valuation Agreement as of
2000;  it uses the transaction value and does
not apply minimum or check prices.
15. The scope of import restrictions and
licensing appears to have increased throughnew special import licences from 2002.  These
affect sensitive products, such as rice, sugar,
footwear, and textiles, and are granted on the
basis of domestic need.  Non-automatic
licences also enforce import controls,including embargoes, mainly on health,
quarantine, environmental, and security
grounds.  Product coverage of import
restrictions is unclear, and the licensing
regime remains opaque.  The restrictiveness ofnon-automatic import licensing is
accompanied by exclusive import rights
accorded to domestic producers of certain
sensitive products, such as rice, cloves,
alcoholic beverages, sugar, and some types ofiron and steel.
16. Non-discriminatory standards are
generally based on or have been aligned with
international norms.  Mandatory standards
(technical regulations) were extended to
fertilizers and raw sugar.  Almost all other
standards are voluntary.  Indonesiaparticipates in international standardizationbodies.  It has increased its involvement in
mutual recognition agreements.  New food
labelling requirements were passed in 1999,
and for imports of GM products in 2001.
17. Indonesia has been an active user of
anti-dumping actions, although the trendappears to be downward.  Of 27 cases
initiated since 1998 (until June 2002),
15 resulted in provisional measures and nine
in definitive anti-dumping duties;  seven
remained in operation in February 2003.Actions have mainly affected base metals and
chemicals imported from  regional suppliers.
Safeguards legislation enacted in late 2002,
largely in response to domestic manufacturers'
concerns, allows higher import duties forbetween 6 and 48 months.  Institutional
arrangements, such as the body responsible
for investigation, are still being implemented.
18. Government procurement is a
significant instrument of industrial policy.
New legislation in 2000 revised discriminatory
procurement practices aimed at encouraginggreater domestic content in order to assist
local industry and expand employment.
Foreign procurement is possible only if there
are no domestic products available, or they do
not meet technical requirements, and then onlyfor contracts above certain thresholds (e.g.
Rp 10 billion for goods) and in cooperation
with small or medium-sized enterprises.
Domestic price preferences on goods have
doubled to 15% (remaining at 7.5% onservices).  Indonesia participates actively in
the WTO Working Group on Transparency in
Government Procurement.
19. Countertrade provisions also apply to
public procurement;  foreign firms tenderingfor certain government contracts, including
construction, must meet export performance
requirements.  While such countertrade has
declined owing to the large slowdown in
public tendering since the crisis, it is likely to
rise as government procurement increases.
There are no local-content provisions (outsidegovernment procurement).  All local-content
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ahead of schedule in January 2000, and
extensive tariff and tax incentives for
automotive local content have been abolished.
20. Only registered and approved
exporters can sell restricted exports.  Export
controls include bans, quotas, licensing, and"supervision".  These are applied widely to
promote higher-value-added activities, to
upgrade export quality, and to ensure
adequate domestic supplies of essential
products at reasonable prices, as well as inaccordance with international commitments,
such as CITES (to protect endangered species)
and the arrangements to restrict textiles and
clothing.  Export bans on round logs and wood
chips were re-applied in 2001, (ostensibly forenvironmental reasons), as well as on urea (to
combat fertilizer shortages) in 2000 and on
mineral sands in 2002. Export controls,
(notably their coverage and economic effects)
remain non-transparent.  Export inspection
was shifted from a private contractor to
Customs in August 2001.
21. Indonesia continues to maintain a
"voluntary" bilateral quota on manioc exports
to the European Union.  It also regulates
certain commodity exports under various
plurilateral export and supply managementarrangements aimed at reducing world over-
supply and the resulting depressed prices.
Such voluntary export quotas applied to coffee
until 2002, when the arrangements terminated,
and to rubber until mid 2002, when theinternational rubber price rose above the
"confidential" reference price set under the
Tripartite Rubber Cooperation (TRC), which
was signed with Malaysia and Thailand in
December 2001.  Trade with Israel remainsbanned.
22. Ad valorem export taxes to promote
downstream processing and higher valued
products have been rationalized.  Coverage
was reduced from 12 to four commodity
groups (rattan, wood, mineral sands, and palm
oil) and rates previously ranging from 10% to40% reduced to 1%, 3%, and 15%.  Taxes are
levied on minimum "check" prices to simplifytax collection and to combat avoidance
through under-invoicing.  While reviewed
regularly, such prices do not always
correspond to world levels, thereby adding
further administrative discretion and
uncertainty over the level, and thus incidence,of such taxes.
23. Direct export assistance is minimal.
Export subsidies were not used during the
review period.  Duty exemption/drawback
schemes and free-trade export and bondedzones facilitate exports, albeit using few
financial incentives.  Bonded zone operators
must seemingly export at least two thirds of
output, excluding components;  domestic sales
cannot exceed 50% of the value of exports(special, higher, limits apply to automotive
producers).  Full foreign equity is allowed for
five years (maximum 95% equity thereafter) in
bonded zones, if all output is exported.  A
state-owned bank (BEI) took over central bank
operations providing commercial trade
(export and import) finance and guarantees inSeptember 1999.  The state-owned Export
Insurance Indonesia (ASEI) provides non-oil
export insurance, including for small and
medium enterprises, and became a general
insurer in 2002.
24. Indirect taxes, such as VAT, sales, and
luxury taxes have, in principle, been non-
discriminatory since 2000.  The luxury tax
exemption for domestic cars was eliminated
after a WTO dispute in 1998.  However, somediscriminatory elements seem to remain, such
as lower sales taxes on Indonesian-made
kretek cigarettes.  It is also unclear whether
regional levies, "retributions", and taxes are
non-discriminatory;  this uncertainty has beenheightened under the decentralized provincial
tax powers.  Luxury taxes were lowered in
early 2003, partly to help domestic producers
compete with smuggled imports.
25. Producers are assisted financially
mainly by industry and/or region-specific tax
incentives;  these were seemingly revised innew legislation effective from 2001.  Trade
and production distorting agricultural marketIndonesia WT/TPR/S/117
Page xi
support includes rice payments through
BULOG.  A fertilizer subsidy for small-scale
rice producers was re-introduced in 2003;
however, its apparent payment on only
domestically made fertilizers seems
inconsistent with the intention of assistingconsumption rather than production.  A
petroleum fuels subsidy, although being
curtailed, favours industrial and public sector
users, and world market prices apply to only a
few activities, such as foreign flagged vessels.Public R&D support promotes high
technology activities.  Subsidized credit
schemes for SMEs and farmers no longer
apply.
26. In order to protect consumers, price
controls have been retained on sensitive items,
such as rice, petrol, LPG, salt, and cement, as
well as on key public utilities and services like
electricity, basic telecommunications, and
transport.
27. An independent Commission for the
Supervision of Business Competition (KPPU)was formed in June 2000 to implement
Indonesia's 1999 anti-monopoly legislation.
Most KPPU cases have concerned tender
collusion involving state-owned enterprises or
government agencies.  It can initiate its owninquiries.  KPPU may also provide "non
public" opinions to government on the
competitive effects of specific anti-dumping
actions, and has done so in two cases (wheat
flour and carbon black).  Export cartels areexcluded from the legislation.
28. Indonesia has sought to strengthen
protection of intellectual property rights
(IPRs) by expanding its international
commitments.  It joined WIPO's CopyrightTreaty in March 2002, and now participates in
seven of its 21 treaties.  Indonesia is
considering ratifying other treaties, such as
the Performance and Phonograms Treaty.
Although it missed the 2000 TRIPS
implementation deadline, Indonesia
introduced legislation on industrial designs,layout-designs of integrated circuits,
protection of plant varieties, and trade secretsin late 2000, and had amended patent, trade
mark, and copyrights laws by July 2001.
However, institutional constraints continue to
impede effective implementation and
enforcement.  Concerns exist over increased
piracy and the effectiveness of the judicialsystem.
(4) S
ECTORAL POLICY DEVELOPMENTS
29. Despite on-going trade reforms,
certain sensitive sectors continue to receive
special government assistance.  In agriculture,such policies largely reflect concern over food
security, and the belief that this concern can
be best met by achieving self-sufficiency in
staple commodities, especially rice.  Market
price support for rice (albeit below WTO deminimus levels of 10% of output) allows floor
producer prices to be set up to 30% above
production costs;  thus, domestic prices of rice
were some 20% to 30% above world levels
during the review period.  Consumer
subsidies, at substantial albeit declining
budgetary cost, help offset these costincreases.
30. While BULOG's rice import monopoly
was eliminated in 1999, it continues to
intervene in the market to stabilize domestic
prices.  The future of operations as a semi-profit organization appears uncertain.
31. Past regulatory controls, including
export restrictions, would seem to have had
little success in addressing over-exploitation
of forests.  Export restrictions, such as the re-imposed ban on round logs, generally do little
to stem over-exploitation, and instead tend to
boost processed timber products, such as
plywood, by possibly depressing domestic log
prices, which may also encourage wastefullogging, processing and conservation
practices. Promoting sustainable forest
management is difficult;  logging concessions
greatly exceed sustainable yields and illegal
logging is widespread.
32. In forestry, the authorities are
addressing weak law enforcement,WT/TPR/S/117 Trade Policy Review
Page xii
institutional and policy failures, including
poor monitoring.  New forestry policies are
aimed mainly at comb ating illegal logging,
restructuring forest-based industries, and
developing reforestation activities.  Indonesia
has introduced selective cutting and plantingsystems for loggers, and in July 2002 issued
regulations to ensure that only legal operators
logging within sustainable limits could
operate;  logging quotas were reduced
sharply.  From 2002, loggers must pay inadvance levies to the Reforestation Fund, a
move designed to mini mize non-payment and
misuse of such funds.
33. The state-owned entity, Pertamina,
licenses all trade in petroleum products, andrequires that foreign firms enter into
production-sharing contracts to explore and
exploit oil and gas reserves.  The petroleum
market is to be deregulated.  Legislation
passed in October 2001 will end Pertamina's
monopoly on oil and natural gas development
within two years (by 2003) and on thedistribution (including trade) of such products
by 2005.  A new oil and gas authority
(BALAK) was formed in 2002 to take over
certain aspects of Pertamina's management,
such as granting oil and gas concessions.New taxes on mining and environmental
regulations have also been introduced, not
always with clear application.
34.  While private firms now dominate
power generation, transmission anddistribution remain the monopoly of the state-
owned electricity company (PLN).  Reforms,
while considerable, fell short of the planned
establishment of a fully competitive multiple
buyer/seller power market by 2003.  Instead,according to new legislation passed in
September 2002, the electricity market is now
to be fully deregulated by 2007.  Electricity
charges are also being increased to reflect
costs.
35. Since 1998, tariff protection for the
manufacturing sector has been reduced froman average applied MFN rate of 9.5% (based
on the ISIC) to 7.2%.  Nonetheless, high tariffsranging from 60% to 170% remain for certain
sectors, such as chemicals, fabricated metal
products, and transport equipment.  Non-tariff
restrictions, especially special licensing
requirements, also apply to certain goods,
(such as textiles and footwear), along withexclusive import rights to local producers of
certain goods (including alcoholic beverages,
textiles, and some iron and steel products).
Some industries are accorded tax holidays and
other incentives.  Trade distorting measures,including prohibitions, countertrade
agreements and tax exemp tions for imports of
components by state-owned enterprises, have
been used in the aerospace industry.
36. The automobile sector has undergone
major policy changes since the industry's
collapse in 1998.  Import substitution policies
gave way to an export-oriented Automotive
Development Policy in June 1999.
Accordingly, import restrictions on cars were
abolished, and tax incentives for local content
removed.  Tariffs on motor vehicles, still highat 80%, were substantially lowered from
200%.  Rates on CKD (completely-knocked-
down) kits were also reduced, from 65% to
25-50% depending upon engine size, and on
components to 15%.  Increased luxury salestaxes, of up to 75%, depending upon engine
size, target imports.  Imports of certain used
cars are banned.
37. Financial services reforms have been
at the heart of Indonesia's recoveryprogramme.  These focused on bank
rehabilitation including state re-capitalization.
The Indonesian Bank Restructuring Agency
(IBRA) is due to close in early 2004.  Despite
major success, the banking system remainsweak and bank intermediation sub-optimal.
Minimum capital adequacy ratios for some
banks remain above the 8% limit (increased
from 4%) and the share of non-performing
loans above the target of 5%.
38. Bank Indonesia's statutory
independence and prudential supervisorypowers have been strengthened, with greater
emphasis on compliance and enforcement.  ItIndonesia WT/TPR/S/117
Page xiii
is adopting the BIS's Basel core principles on
effective supervision.  A Financial Supervisory
Authority is planned by mid-2005 to regulate
all financial institutions, including banks;
enabling legislation has slipped, however,
and is now due in mid 2003.  A selectivedeposit insurance scheme is to replace the
blanket guarantee of bank liabilities by 2004.
39. Banks must be Indonesian-owned or
joint ventures (with maximum 99% foreign
equity).  To operate, foreign bank branchesmust be among the 200 largest world banks,
have at least an international "A" credit
rating, and a minimum operating fund of
Rp 3 trillion.  Bank Indonesia applies an
economic needs test in issuing bank licences.It must approve opening (and closing) of bank
branches, including foreign representative
offices.  Restrictions on the number of foreign
bank branches outside Jakarta no longer
apply.
40. Regulation and supervision of
insurance activities, currently conducted bythe Ministry of Finance, have been
strengthened.  Foreign branches are not
allowed;  joint ventures are required (80%
maximum foreign-ownership of equity).  No
restrictions apply to overseas reinsurance.
41. Partial liberalization of basic telecom
services is to be accelerated under new
legislation effective in September 2000.  The
national call monopoly is progressively being
replaced by a statutory duopoly comprisingtwo majority state-owned companies, the
incumbent, Telekom and Indosat.  Telekom's
monopoly on local calls was terminated in
2002 (instead of by 2011) and will cease on
long distance calls in 2003.  The statutoryduopoly in the international call market is also
to be expanded to three carriers from 2003
(instead of 2005);  Telekom will join the
incumbents, Indosat and Satelindo (partly
owned by Indosat).  Foreign equity in all three
carriers remains limited.  In late 2002, the
Government divested 42% equity in Indosatoverseas.42. While the new arrangements are an
improvement, maintaining a fixed number of
carriers may limit the resulting efficiency
gains.  The regulatory framework is also being
enhanced to safeguard competition;  monopoly
practices and unfavourable competition areoutlawed.
43. Cabotage restrictions apply to road
transport, and foreign investment is prohibited
in public transport (taxi and bus services).
Rail and bus fares are subsidized.  Foreigninvestment of up to 95% in joint ventures is
allowed in public train services.  Scheduled
domestic air services are open to new
carriers;  foreign operators must form joint
ventures, with maximum equity of 49%.Bilateral agreements govern international air
services, and prohibit cabotage.  Foreign
investment in inter-island shipping services is
prohibited, and cabotage restrictions apply.
Provinces are increasingly regulating tourism.
Foreign investment limits generally restrict
equity to 49%, unless resorts are located inspecified regions.
(5) P
ROSPECTS
44. Trade liberalization, other structural
reforms, and enhanced stabilization policies
have contributed to Indonesia's economicturnaround following the Asian crisis.  It has
increased its openness to trade through
unilateral, as well as multilateral
liberalization.  However, robust economic
growth is yet to be achieved, and furtherstructural and other economic reforms are
needed.  While the Government appears to
have recently renewed its resolve to undertake
major reforms, Indonesia could take
advantage of the multilateral system to furtherlock in and advance its unilateral reforms in
several areas (e.g. deregulation and
privatization).
45. This would also help boost investor
confidence and, if matched by necessary
institutional and economic governance
reforms, would facilitate foreign investment, akey to Indonesia's future prospects.WT/TPR/S/117 Trade Policy Review
Page xiv
Accelerated privatization and further reforms
to state-owned enterprises together with
deregulation and measures to improve
competition could also help improve the
economic environment.
46. Indonesia generally applies its trade
policies on a non-discriminatory basis.
However, it appears to be pursuing greater
regional efforts, individually and within
ASEAN.  The pursuit of "open regionalism"would help Indonesia and its WTO trading
partners maximize benefits and avoid possible
trade diversion arising from discriminatory
trade agreements.
47. Continued trade liberalization
accompanied by economic reforms in otherareas should help to provide the basis for the
sustained growth of the Indonesian economy.
Its trading partners can greatly assist
Indonesia's efforts by ensuring stable and
unrestricted access to their markets.