FWD: How IMF will increase pressure on Indonesia's Forests (fwd)

[Robert Weissman <rob@essential.org>]

 "The Indonesian Economic Crisis and Its Impact on the Forest Sector:
A CIFOR Perspective."

Also available at: http://www.cgiar.org/cifor/

Daju Pradnja Resosudarmo

THE INDONESIAN ECONOMIC CRISIS:
HOW WILL IT AFFECT THE FOREST SECTOR?

Thursday February 18, 1998

As the economic crisis in Indonesia unfolds, CIFOR is monitoring the
situation
closely to understand how the country's forests and forest-dependent people
will
be affected.  Undoubtedly the crisis implies profound near-term changes in
the
forest sector, as it does for all sectors of the economy, but as yet one can
only
guess what the net effect of those changes will be.  This statement
describes
certain likely changes based on general knowledge about the effects of
economic crises and structural adjustment, and on preliminary news about
changes in various sectors of the economy.

Background

Since July 1997 the value of the Rupiah (Indonesian currency) has fallen
from
Rp. 2,450 to approximately Rp. 10,000 against the US dollar.  At more than
70%,
this is the steepest currency devaluation among all countries in Asia
affected
by the crisis.  Being on the brink of economic collapse in January 1998,
the Indonesian government had no choice but to accept dramatic policy
changes and austerity measures imposed by the International Monetary Fund
(IMF) in exchange for a $43 billion bail-out package.  Among these are
provisions that affect the forest sector directly or indirectly.

Indonesia's forests and forest communities will be affected not only by
policy
changes,  but perhaps even more so by sweeping socioeconomic changes that
result from the currency devaluation.  Among these changes are that the
devaluation creates economic opportunities, inasmuch as certain Indonesian
commodity exports are now more competitive on the international market.  Yet
the devaluation also imposes severe constraints on the government's ability
to
improve economic conditions.  There are daunting limits on the government's
capacity to maintain subsidies and expenditures for infrastructure, for
example.


Decreasing and increasing pressures on forests

The economic crisis is changing the configuration of forest land use.  On
one
 hand, the timber sector is experiencing decreased demand for its exports.
This
 will alleviate some of the pressures on Indonesian forests from
unsustainable
 harvest rates and poor harvesting practices in recent years.  On the other
hand,
 it is possible that this lightened pressure on forests will be more than
offset by
 increased demands for forest land conversion from outside the forest
sector.

Minister of Forestry Djamaludin Suryohadikusumo stated that export revenue
from wood and wood-related exports would decline from USD 8.3 billion in
1996
to USD 6.24 billion in 1997 -- a drop of 25 percent.  This has occurred
mainly
because of declining demand from Japan, the biggest importer of Indonesian
wood, and South Korea, another leading importer.  It was hoped that demand
from the United States would pick up the slack, but this has not yet
happened.
5.9 million cubic meters of timber have been left in the forest and there is
a risk
it will rot if not processed in three months.  Timber companies have been
laying
off workers to avoid bankruptcy and Djamaludin has suggested that these
companies rent out their workers and heavy equipment to develop plantation
areas.

Among the changes that will probably aggravate pressures on forests most are
expected growth in agroexports in general, migration to rural areas, and
enhanced attractiveness of exporting mineral products.  The following are
some of the preliminary indications that such changes are taking place.

Agro-export commodities.  Land for agro-export production will probably be
increased greatly in the coming year, and some of this will be at the
expense
of forest cover.  Export of agricultural commodities (such as palm oil,
cocoa,
rubber, coffee, and pepper) is extremely attractive not only because the
currency devaluation allows Indonesia to under-price its competitors and
increases incomes to producers, but also because input costs are paid in
rupiahs rather than dollars. The potential of agribusiness is so large that
one observer calls it a "safety valve" against social instability because it
can
absorb labor while producing strategic commodities (see "migration," below).

Palm oil is potentially the most important commodity in terms of impact on
forest cover.  The present area of oil palm estates is approximately two
million ha and the Ministry of Agriculture has announced that 1.5 million ha
will be added in 1998.  An investment of Rp. 12 trillion (about US$1.2
billion
at the current exchange rate) will be made in these new lands as part of a
new
government policy to address the monetary crisis through agribusiness
development. Most new oil palm lands will be in eastern Indonesia where
land is said to be more abundant.  Foreign investment laws have recently
been liberalized to accelerate development of this commodity.  There is
currently a ban on the export of Indonesia's crude palm oil and cooking oil
in order to assure that domestic supplies will be adequate.  Minister of
Agriculture Sjarifudin Baharsjah has said the ban will be lifted as soon
as the market returns to normal.

A six-fold increase in the producer price of cocoa between mid-1997 and
January 1998 has greatly stimulated production.  It is estimated the area
of cocoa lands in South Sulawesi (where most Indonesian cocoa is currently
grown) will increase from 160,000 in 1997 to 220,000 ha in 2000.  Interest
in
coffee production has been greatly stimulated, notably in Aceh (North
Sumatra), the center of Indonesia's arabica coffee production.

Migration to rural areas.  It is estimated that the number of people
unemployed in Indonesia will climb from 4.4 million in 1997 to either 8.7
million (National Planning Board estimate) or to over 20 million
(Department of Manpower estimate).  There is anecdotal evidence that many
unemployed people in the urban sector are migrating to rural areas in search
of employment.  This makes sense both because of the collapse of employment
in the industrial, manufacturing, and service sectors, and also because of
agriculture's potential contribution toward alleviating the crisis (see
above).
Although an increasing rural population need not necessarily imply pressure
on forests, it may well do so in the case of the Indonesian crisis for three
 reasons: (1) the incentives to expand agro-export lands are strong; (2)
there
may be price incentives to produce food crops domestically that would
otherwise be imported; and (3) a shortage of capital for inputs will
encourage extensive agriculture.  Though there is no evidence of net
urban-rural migration, it is probable that the rate of urban population
growth (5.36 percent on average in 1980-1990) has slowed.

Mining.  Mining, like agriculture for export, is an attractive option in the
midst of the crisis because most of the revenue will be in US dollars while
most of the costs other than machinery are in rupiah.  Mineral resources
 in Indonesia's forest areas are substantial and include coal (204 million
tons
and 6.7 percent of national reserves), iron ore (370 million tons and 51
percent
of national reserves), and nickel (375 million tons and 71 percent of
national
 reserves).  In February 1998, contracts of work for mining will be awarded
to
 80 foreign companies for the exploitation of coal, gold, silver, copper,
and
nickel.  There are presently a total of 269 contracts of work for mining in
force, including those approved recently and those approved in previous
years.

Economic crises in developing countries typically lead to a decline in
government spending on infrastructure and on directed settlement programs
and this, in turn, tends to alleviate pressure on forest cover.  (Road and
bridge
construction contributes to tropical deforestation by enabling logging and
the
establishment of plantations in areas that were formerly inaccessible, and
by
facilitating spontaneous and directed settlement.)  Indonesia's spending on
infrastructure and directed settlement in 1998-1999 will probably not
decline,
however, because the shortfall will be compensated by foreign aid.  In fact,
with
increased support from the World Bank, the 1998-1999 budget of the
Department of Public Works will be more than 50 percent higher than last
year's.  (This is partly because expenditures in the 1997-1998 budget were
postponed.)  The Department of Transmigration has a shortfall of seven
percent
in this year's budget compared to last year's, but this will be partly
offset by
support from the IMF and other sources of foreign aid.  In 1989-1999, 77,500
families will be transmigrated to the outer islands (mostly to eastern
Indonesia), of which 12,500 will go to the controversial one million ha peat
land site in Central Kalimantan.

The effect of the crisis on forests will depend to a considerable extent on
how
the broad tendencies described above are played out, and as well on other
factors about which we currently know little, including the changing
farming systems of smallholders in forest communities as they adapt to
effects of the economic crisis.  At present there are four causes for
concern
because increased demands for land are likely to accelerate the formal
process of conversion of forest lands to non-forest uses.  Unauthorized
conversions may increase as well.  An additional source of concern is that
if timber concessions are not able to contribute meaningfully to alleviating
the economic crisis, the Ministry of Forestry may find it difficult to fend
off
demands to convert production forests to non-forest uses.


Effects of IMF-imposed policy changes

Among the key provision of the IMF package that affect the forest sector
are the following:

*  Reduce export taxes on logs and rattan to a maximum of 10% ad valorem
in March, 1998.

*  Eliminate the Indonesian Plywood Association (APKINDO)'s monopoly
over plywood exports.

*  Remove the ban on palm oil product exports and replace it with an export
tax of 20% or less.

*  Transfer control over all government - owned commercial forestry
companies from the Ministry of Forestry to the Ministry of Finance.

* Reduce land conversion targets to environmentally sustainable levels and
implement a system of performance bonds for forest concessions by the end
of 1998.

*  Incorporate the reforestation fund into the national budget, use money in
the fund only for reforestation purposes, and charge reforestation fees in
rupiah rather than dollars. (Previously, the fund was managed as an off-
budget account by the Ministry of Forestry, and occassionally used for non-
forest related purposes.)

*  Create new resource rent taxes on timber resources, increase timber
stumpage fees charged to forest concessions, and implement an auction
system to allocate new concessions.

*  Remove restrictions on foreign investment in palm oil plantations.

*  Increase the proportion of the market value of land and buildings
assessable for tax purposes to 40% for plantations and forest property.

It is too early to tell what the outcome of these mandated policy changes
will be, partly because they were recently required by the IMF, and partly
because there appears to be resistance to implementing certain policies.
For example, in spite of the provision requiring elimination of APKINDO's
monopoly over plywood exports, the cartel continues to operate and recently
requested that all plywood exporters pay Rp. 50,000 per m3 to establish a
Center for Statistics.

Conclusion

It is still too early to tell what the effect of the economic crisis and new
policies
will be on Indonesia's forests and forest-dependent communities.
Nonetheless,
the preliminary evidence presented above suggests the possibility of
increased
conversion of forest lands to non-forest uses, and there is ample reason for
oncern about the well-being of people in forest communities.

There are legitimate grounds for the government to promote increased
dependence on agriculture, given the gravity of the crisis and Indonesia's
comparative advantage in commodity exports at this time.  However the
government would do well to proceed carefully and to remember that
Indonesia's forests provide invaluable and irreplaceable long-term services
-- both economic and ecological, and in both good times and bad.  Caution
should be exercized to be sure that sites chosen for agribusiness projects
do
not threaten the livelihoods of small producers, and that forests of high
ecological value are protected.  Consciousness about the need to conserve
and properly manage Indonesia's forests should be increased, not decreased,
in the midst of this difficult time.

_______________

Documentation of the sources for this news brief available on request.

CIFOR will be monitoring the effects of the crisis on Indonesia's forests
and forest communities and we will periodically update this statement
and produce research reports related to the crisis.  If you are interested
in receiving future materials on these topics as they are produced,
please contact Daju Pradnja Resosudarmo at d.pradnja@cgnet.com