Shoeb Kagda, Jakarta – In a major shift in economic direction, Indonesia's newly-elected President Abdurrahman Wahid has asked the International Monetary Fund (IMF) to focus more on agriculture under its US$49 billion (S$81.5 billion) rescue plan for the country.

Speaking to reporters after meeting the president yesterday, the IMF's Asia-Pacific director Hubert Neiss said that the Indonesian leader wanted the new policy direction to be spelt out in the next Letter of Intent (LOI), which is expected to be completed by mid-December. Countries that receive IMF funding agree with the multilateral body on periodic economic targets under the so-called LOI.

Apart from agriculture, the president asked for more resources for small and medium-sized enterprises because a large part of the country's population work in these sectors, Mr Neiss said. The IMF official said it is willing to accommodate the new policy directions although the final decision rests with its central executive board.

Mr Neiss noted that the IMF's programmes are not rigid and can be modified and adapted to suit changing economic conditions. "I think the president did make the point several times that he wants to carry out economic policies with specific Indonesian conditions ... and now I am standing in a specific Indonesian world and I assured him that we will respect it."

While details are still sketchy, the back-to-basics policy drive of the new administration is a dramatic turnaround from the policies adopted by his two predecessors – former presidents Suharto and BJ Habibie – both of whom put their faith in the manufacturing sector and hi-tech industries as the main engines of economic growth.

As a result, the agricultural sector, which in the 1980s was the largest contributor to gross domestic product (GDP), slipped to third place behind the manufacturing and services sectors by 1997. Last year, agricultural output contributed 19.5 per cent to Indonesia's GDP, against 24.8 per cent by the manufacturing sector and 19.8 per cent by the services sector, which includes finance and communications. But with both these sectors devastated by the two-year-long economic crisis, the agricultural sector has once again moved to the forefront of economic policy-making.

According to various estimates, between 60 and 70 per cent of the country's 210 million people live and work in the countryside, making the sector the biggest employer.

HS Dillon, an agricultural economist who serves as an informal adviser to the president, told BT that the new policy direction was primarily aimed at ensuring food security and enhancing the productivity of farmers.

"The farmer was marginalised in the drive to industrialise," he noted. "But with 70 per cent of the population living in the countryside, you are developing the people rather than just a sector by improving agricultural output."

Mr Dillon said that it was important to distinguish between boosting agricultural output and expanding the agribusiness sector. "In the agribusiness sector, the commercial considerations demand that companies maximise short-term profits but in agricultural development, you have to take the long-term view."

The new focus on agriculture, however, has some analysts wondering if this will be at the expense of manufacturing which in the past has been the main engine for export growth. They note too that a heavy emphasis on agriculture could lead to higher subsidies for farmers for the purchase of fertilisers, for example, and that would be a drain on government coffers that Indonesia can ill-afford at present.

It also remains unclear what the role of the National Logistics Agency (Bulog) – the country's agricultural distribution monopoly under the Suharto regime – would be within the new framework.

Created to maintain price stability for commodities such as rice and wheat, Bulog was heavily criticised because it benefited the family and friends of Mr Suharto.

"The new policy makes sense because given Indonesia's comparative advantage, more attention should be focused on the agricultural sector which was largely unaffected by the crisis," said Joshua Tanja, head of Research at PT Paribas Asia Equity. "What does not make sense is protecting the farmers from competition and allowing Bulog to control the prices of commodities."

If that were to happen, it would go against the grain of the IMF-led economic reform programme and "would not be seen favourably by the market", he added.

Sri Mulyani Indrawati, a senior economist at University of Indonesia, also noted that currently, there was too much price distortion and government intervention in the agricultural sector. "The government needs to redefine its policy towards the agricultural sector but it should not be a trade-off vis-a-vis the manufacturing and service sectors," the senior economist said.

Rebuilding the agricultural sector should go hand-in-hand with reforming the banking sector and restructuring debt-laden corporations, analysts said. Given endemic corruption at all levels of the government bureaucracy, there are also fears that any new money diverted to promoting agriculture could instead land up in the pockets of bureaucrats who still exert considerable influence in the villages of the vast archipelago.