Raphael Pura, Jakarta – A food crisis is closing in on Indonesia. The coming crunch could compel the beleaguered country to seek at least $1 billion in emergency funds for short-term food subsidies to supplement an International Monetary Fund-backed financial rescue package announced last month. But even with such help, Jakarta faces a triple-digit-percentage price explosion for imported food staples within weeks – a development likely to provoke an angry backlash from Indonesians already struggling to cope with a 73% decline in the value of their currency, the rupiah, against the U.S. dollar since July.
The dimensions of the food crisis are stark, according to Indonesian officials and foreign agricultural experts who are watching the situation with growing alarm. The impact of a lingering drought is expected to shrink domestic food output – including crucial rice production – for the second consecutive year. That will force Jakarta to import a record amount of rice – more than five million metric tons – in 1998 at an estimated cost of $1 billion to $1.5 billion.
At the same time, an IMF-mandated elimination of state-held monopolies that have partially subsidized other key imported commodities will prompt rupiah price jumps of 250% to 500% for items such as sugar, soybeans and wheat flour, unless the Indonesian government steps in to buffer the blow with huge new outlays that it can't afford. The country currently imports 100% of its wheat, one-third of its sugar and soybeans and as much as 10% of its rice.
"We agree fully with the IMF [agreement to end the monopolies], but how to implement it in the conditions we have now is the question," says Beddu Amang, a U.S.-trained economist who is chairman of Indonesia's National Logistics Board, which has long run the monopolies. "Because of the [rupiah] depreciation, the slowdown in the economy and because of drought, peoples' purchasing power has declined," he adds.
'Scary situation'
Bulog, as the board is known, was to relinquish its monopolies for all commodities except rice on Feb. 1. But the agency – with the tacit blessing of Indonesian economic officials – has continued to shield consumers from the full brunt of import-price increases by releasing existing stocks at subsidized prices and by absorbing the cost of new imports. Bulog officials say the agency has stocks of rice, sugar, wheat and soybeans to last at least until Indonesia's next fiscal year begins on April 1. "Until the end of March, we are still there with subsidized prices," says a Bulog executive, who adds, "But after that, what? What's the policy?" The prospect of enormous food-price increases comes at a time when domestic food supplies and prices are already under mounting pressure. Last week, for example, cooking-oil prices jumped when merchants were released from a commitment to hold down prices during just-ended Muslim holidays; by the weekend, stocks had disappeared from some Jakarta shops. Reports of other shortages pop up daily as the impact of higher import bills reverberates through the food-supply chain. One fresh victim: the poultry industry, where meat and egg production has collapsed because companies can't afford to buy imported feed. "In 60 days' time, we'll have a scary situation," says an Indonesia food-industry chief executive, who adds, "Things may be available, but they won't be affordable."
Rising food prices – already up 24% over the past 10 months, according to Indonesian government statistics – and fears of supply shortages are the main causes of the sporadic rioting that has shaken parts of Indonesia over the last few weeks. Angry Indonesians have attacked shops in regional towns and cities, in particular targeting enterprises run by the country's small, but commercially dominant ethnic-Chinese minority.
Such social unrest – with its racial overtones – is seen as a growing security and political flashpoint for Indonesia and its 76-year-old President Suharto, who is expected to begin his seventh five-year term in office next month. The food problem is an acute embarrassment for Mr. Suharto, a native of rural Java who has prided himself on increasing the country's food production during his 32 years in power.
The recent rioting stems "mostly from the incapacity of people to buy foodstuffs" and isn't yet overtly political, says Lukman Soetrisno, an economist at Gadjah Mada University. But he warns that a "food crisis can bring a government down" if it isn't addressed. A foreign agricultural specialist concurs: "There's no social safety net in Indonesia – the only safety net was growing by 7% [per] year," as the country did for the past decade. This year, the government and IMF officially forecast zero economic growth. But some independent economists are predicting the economy may contract by as much as 5% and labor officials concede that unemployment is rising sharply.
Urgent dilemma
The food crisis poses an urgent and painful policy dilemma for Indonesia's government and for IMF and World Bank advisers involved in Indonesia's $33 billion financial-bailout plan. Foreign agriculture experts say Indonesia's key international allies recognize the country's need for immediate financial assistance for food beyond what will be available in the IMF package. But they say donors are reluctant to provide funds if Jakarta appears intent on continuing to subsidize commodities other than rice and on permitting Bulog to effectively maintain its nonrice trade monopolies indefinitely.
"We need to link the whole IMF set of conditions to short-term steps to make sure we don't have a famine," says a foreign adviser working on Indonesian food policy. He argues that the IMF, the World Bank and international capital markets can accept a staged transition of the Indonesian rice price to full free-market levels over a couple of years. But, he says, "capital markets will balk if you're going to hold all four of the other commodities in Bulog's hands and [subsidize them] for another 18 months or more."
During the last three weeks, the World Bank has assembled a group of international donors to raise $1 billion for an "emergency food package" for Indonesia, according to people familiar with the plan. The Asian Development Bank, the Food and Agriculture Organization and the governments of the U.S., Canada, Australia and Japan have joined the effort. Japan is prepared to ship Indonesia one million metric tons of rice under the plan, while other countries and organizations would chip in with cash or technical help.
The World Bank will formally propose its plan to Indonesian officials this week and hopes to move at least some of the aid to Indonesia by next month. One economist contends that the $1 billion package – including the Japanese shipment of rice – would be enough to help subsidize the rice price to consumers at a level 25% to 50% above its current trading price through Indonesia's coming fiscal year. But it wouldn't be sufficient to subsidize prices of other commodities at current levels for long. "You can't subsidize anything but rice for more than a few more months," he says, adding, "My concern is [the government] may try to use a lot of resources trying to keep everything stable." "This Is a Bad Policy'
In particular, some foreign and Indonesian economists call for an end to subsidies on wheat, which have underwritten rapidly expanding baked-goods and noodle markets in Indonesia. Until November, Bulog held a monopoly on wheat imports; the agency also held a monopoly on domestic wheat-flour distribution, which supposedly ended on Feb. 1.
Bulog's wheat monopolies have long been a target of government critics because of the central role played in them by Indonesia's biggest private conglomerate, the Salim Group. Founded by Indonesia's wealthiest entrepreneur and long-time Suharto friend, Liem Sioe Liong, the Salim Group among other things imports wheat on Bulog's behalf and holds quasiexclusive rights to mill it for a fee. The resulting wheat flour returns to Bulog, which sells it at a subsidized price in the domestic market. The Salim Group's food arm, PT Indofood Sukses Makmur, which has a lock on Indonesia's instant-noodle market, was a major customer.
People familiar with the situation say Bulog continues to maintain de facto control over wheat-flour distribution and prices despite the passing of the Feb. 1 deadline to end the monopoly.
"This is a bad policy," says an Indonesian agricultural economist, adding, "The wheat subsidy was huge before and it will be even bigger" if it continues. But breaking Indonesia's wheat-dependency won't be easy or popular, since inexpensive-pricing policies have converted millions of urban-dwelling Indonesians to wheat products. "It's the urban poor's staple food," says a foreign economist.
The $1 billion World Bank plan may not be enough to suit the Indonesian government, however. Some economic and political analysts believe, for example, that Mr. Suharto would like to maintain food subsidies for a longer period to contain social unrest. Sticking to current prices of all the commodities Bulog controlled, according to one Indonesian government estimate, would cost about 18 trillion rupiah ($1.94 billion) in the financial year beginning April 1, up from 12 trillion rupiah in the current year. Doing so would be a clear breach of Jakarta's commitment to end the commodities monopolies and would also bust the IMF's limit on the Indonesian government's budget deficit, set at 1% of gross domestic product.
Distant goal
The scale of the problem wasn't evident on Jan. 15, when Indonesia agreed to a 50-point economic-reform package hammered out with the IMF to salvage the country's rapidly failing economy. Under the IMF plan, Bulog was to open all its monopolies, save rice imports, to free competition on Feb. 1. At the time, the IMF's managing director, Michel Camdessus, said he hoped the reforms would reverse a sharp slide in the rupiah, strengthening the Indonesian currency to a level that would mitigate rupiah price increases for the commodity imports scheduled to be freed. So far, that hasn't happened: Although the rupiah has recovered from a low of 17,000 rupiah to the U.S. dollar, at its current rate of about 9,500 rupiah, imports cost Indonesia about four times what they did last August.
Mr. Suharto formally accepted the IMF measures at the time. But in a speech the same day, the president indicated he had reservations about some of them, in particular, the elimination of Bulog's monopolies. In his speech, Mr. Suharto alluded to an apparent difference of view with the IMF and World Bank regarding Bulog's role and said that "we'll wait and see how that develops" when the monopolies end.
"The question is can we apply this IMF commitment directly, or are we going to apply this in stages over one or two years," says Bulog's Mr. Beddu, who suggests that economic analysts sometimes don't fully weigh the social and political implications of food-related problems. "We all agree that at the end, we have to reach what IMF wanted – a totally free market, both domestically and in foreign imports. That's our goal, [but] I don't know when we can reach it."
Freeing market prices could provide an incentive for more local production of sugar and soybeans, which would benefit Indonesian farmers in the long run. But Indonesia is unlikely to become self-sufficient in either commodity and expensive imports would have to plug any supply gap.
Some Indonesian economists also worry that the end of Bulog's monopolies might mean the beginning of private-sector monopolies for the same products because – in the current financial crunch – only Indonesia's strongest companies would have the resources to import and distribute key commodities. Until Indonesia's current financial crisis stalled the economy, the country imported four million tons of wheat, 1.1 million tons of sugar and 700,000 tons of soybeans per year.
"The poor will go from tiger's mouth into the crocodile's mouth," suggests Mr. Lukman of Gadjah Mada University. H.S. Dillon, executive director of the Center for Agriculture Policy Studies, concurs, calling the sudden dismantling of Bulog's monopolies "very rash." He adds: "No private companies are prepared to step into the breach and import commodities, except those controlled by powerful business tycoons."