Breaking news: Asia’s crisis and Indonesia’s forests


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The massive economic crisis that has devastated many Asian economies will probably have a greater impact on the region’s forest than any other event during the last fifteen years. Every day brings new announcements about dramatic changes in the policies and economic conditions affecting the region’s forests, of a magnitude that would have been simply unthinkable several months ago. These changes will affect the lives of millions of people and the way people use vast areas of land.

It is still far too soon to predict whether the long-term effect will be good for forests and the people who depend on them. For the moment, all we can do is monitor the most important changes and speculate on their possible consequences. This message focuses on some of the most important developments to date with regards to changes affecting Indonesia’s forests.

Changes in Economic Conditions

Since July, 1997, the Indonesian rupiah has fallen from below 2,450 rupiah to the dollar to over 10,000. Normally, one would expect a huge devaluation such as this to be good for exporters, who sell their products in dollars but whose costs go down with the value of the rupiah. Since most activities that have been blamed for forest clearing and degradation in Indonesia – such as production of plywood, pulp, and palm oil – are largely for export, this would imply that the devaluation should stimulate those activities and put greater pressure on forest resources. In fact, the evidence suggests that is exactly what occurred in 1986, the last time Indonesia had a major devaluation.

This time around, the situation appears rather different. Unlike the mid-1980s, when Indonesia’s economic difficulties were due largely to sluggish oil prices and hardly affected its neighbors, this time the crisis is regional. Two of the major importers of Indonesian forest products, South Korea and Japan, both also face major economic difficulties, and have reduced their demand for Indonesian plywood by some 30%. Both countries use Indonesian plywood mostly for construction, a sector particularly hard hit by the recent crisis. As a result, Indonesia’ Minister of Forestry has predicted the countries’ wood-related exports will drop by 25% in 1998, from US $8.3 billion to $ US 6.24 billion (Jakarta Post, Dec. 30, 1997). The same minister also reported that many logging companies were in serious financial trouble and were laying off workers. According to him, ’at leat 5.9 million cubic meeters of cut logs remain inthe forests because the timber estates have stopped operations’ (Jakarta Post, Jan. 15, 1998).

Exporters of products made from oil palm have found it difficult to benefit from the devaluation since November, because the Indonesian government first restricted exports to no more than 20% of total production and then, in January, prohibited exports completely for three months. The government did this to try to limit increases in domestic cooking oil prices by making more oil available to local markets. It is expected, however, that these prohibitions will only be temporary and there have been reports that some producers have tried to get around the prohibitions by smuggling palm oil products out of the country. (See below.)

Pulp exporters with small foreign debts have probably been among those who have benefitted most from the recent devaluation. Indonesian pulp production has been rising sharply for the last few years, and the country’s pulp mills are probably well poised to take advantage of declining costs. Even before the crisis, Indonesia was one of the lowest cost pulp producers in the world.

Recent cost savings for export producers in general have come mostly from the dramatic declines in the dollar costs for salaries and fuel. The current price of a gallon of gasoline is only seven cents (US) per litre, though it will rise after April, as the government gradually removes fuel subsidies.

Even many profitable exporters, however, face difficulties caused by the growing instability in the Indonesian banking sector. It has become increasingly difficult to obtain routine loans for working capital or commercial credits to import machinery and spare parts. Many exporters also belong to large consortium that have severe economic problems because they have large short-term debts to foreign banks in dollars, and their domestic sales cannot generate sufficient rupiahs to repay them.

In late January, 1998, the financial rating agency, Pefindo, down-graded the financial ratings of three pulp and paper companies, while re-affirming the positive ratings for five others. The companies down-graded had higher dollar-denominated foreign debts and/or rely heavily on the domestic market for their sales. Pefindo also reported that the pulp, paper, and plywood companies it rated had a combined foreign debt of US $6.2 billion in June, 1997 (Jakarta Post, January 27, 1998).

Changes in Policy

The outlook has been made even more uncertain by sweeping reforms in foresty policy made under pressure from the International Monetary Fund (IMF). Many of these reforms have been proposed by the World Bank and other international agencies for a long time, but were strongly resisted by Indonesian policymakers and corporations. In the past month, however, this resistance collapsed in the face of the country’s urgent need to obtain financial support. Among the most important reforms the government has said that it will do the following:

* Reduce export taxes on logs and rattan to a maximum of 10% ad valorem in March, 1998. (Previously, very high export taxes made it almost impossible to legally export unprocessed logs or rattan.)

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

* Remove the ban on palm oil product exports, and its replacement 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, an increase in timber stumpage fees charged to forest concessions, and implementation of 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.

Most of these reforms form part of the government’s recent ’letter of intent’ signed with the IMF, and hence constitute conditions which must be fulfilled to obtain continued disbusal of IMF funds.

In a number of instances, the government has already taken concrete steps to carry out these reforms. In at least one case, however, government officials have made remarks that could be considered contrary to the reforms’ intent. Several officials have suggested that the government may impose export quotas on logs to ensure the plywood industry has an adequate supply of raw materials. This contradicts the spirit, if not the letter, of the agreement to limit export taxes on logs to a maximum of 10%. Nevertheless, the government has yet to announce a final decision on this matter.


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Further reading

Over the coming months, CIFOR will be following closely the implementation of these reforms and their possible impacts. If you are interested in receiving future materials on these topics as we generate them, please contact Daju Pradnja Resosudarmo at