FAO GLOBAL INFORMATION AND EARLY WARNING SYSTEM ON FOOD AND AGRICULTURE
In March 1999 an FAO/WFP Crop and Food Supply Assessment Mission to Indonesia reported a number of food supply difficulties due principally to the effects of earlier economic crisis in the country in 1997/1998, compounded by a poor agricultural year due to El Niño related drought. In the later half of 1998, the Indonesian economy contracted heavily, by an estimated 20 percent, leading to a rapid, and unforeseen, increase in unemployment. This in turn, eroded the livelihood of large sections of the population, increasing poverty levels and vulnerability to food insecurity. As a knock-on effect of the economic turmoil, in early/mid-1998, food prices rose sharply, whilst purchasing power fell dramatically due to unemployment and falling real wages. The general prognosis, in early 1999 was that economic growth and recovery would remain highly limited with consequent repercussions for food security, especially amongst the poor, who had been hardest hit by the crisis.
Particularly amongst the poorest sectors of the population there were concerns that savings and assets would be further depleted, significantly compromising their ability to access food markets and cope with reduced food supplies. The situation, moreover, was considered to be appreciably worse in urban areas, where unemployment had been more pronounced, than in rural areas, which also had the benefit of additional coping strategies. In addition to generalised economic problems, in 1998/99 food supplies were also affected by poor security and civil unrest in parts of the country, which had resulted in market failures, as traders reduced stocks and trading due to security concerns. This together with the diminished role of the National Logistics Planning Agency, BULOG, led to considerable variation in supplies and prices across the country, further restricting the access of the poorest to markets.
In response to the crisis, the Government in July 1998 introduced the OPK programme to provide the most vulnerable families subsidised rice to ensure food security. The country also received large volumes of international food and financial aid to support ongoing national efforts to counter the social impact of the crisis. The key elements of which were; maintaining food security; expanding employment and income generation opportunities and preserving access to critical social services.
The March mission generally concluded that whilst some recovery in agriculture and the economy was envisaged in 1999 and the short term, the longer-term prospects for employment, growth and food security, especially amongst the most vulnerable, remained uncertain.
A visit by FAO GIEWS to Indonesia in December last year, indicates that since the March 1999 mission a number of developments have taken place that have had a direct impact on food security.
Whilst Indonesia experienced severe economic contraction in 1998, by the middle of last year the economy was again growing positively. In addition, the rates of inflation and borrowing also fell to more reasonable levels, stimulating greater consumer confidence and activity. This will have a positive impact on sectors such as poultry, for example, as demand for meat and hence feed is expected to increase. In addition, short term economic prospects in Indonesia, will also be favoured by positive regional developments, as more countries hit by the financial crisis, show signs of stronger economic recovery and stability than forecast earlier.
Although, economic growth is now projected to remain positive over the next few years, it is likely, however, to remain well below five percent and pre crisis levels. Overall, prospects of a more stable economy have had a positive impact on both exchange rates and food prices, both of which have shown relative stability and improvement since the height of the crisis in late 1997 early 1998. (Charts 1 and 2). There has been a more or less continuous monthly decline in the overall consumer price index throughout 1999.
Another positive aspect, with regard to food security, has been that the rate of open unemployment, has not been as severe as initially feared in the aftermath of the crisis. Recent studies by the International Labour Organisation (ILO), indicate the rate of unemployment increased from 4.7 percent of the workforce in 1997 to 5.4 percent in 1998, well below original estimates. Nonetheless the impact of the crisis on employment was felt in a number of other ways; The number of people engaged in agriculture increased substantially, from 35.8 million (41 percent of total employed) in 1997 to 40.4 million (45 percent) in 1998 as migration from cities to rural areas grew and the relative importance of the industrial and service sectors fell. The proportion of people underemployed and/or engaged in the informal sector also increased substantially.
Some recovery in agricultural production is also anticipated in 1999/2000, in view of greater economic stability, increasing consumer confidence and specific Government programmes and efforts at increasing domestic food security and self sufficiency. Rice is currently in mid season (Oct-Mar), with rainfall this season having being mostly favourable. In addition, no undue pest problems have been reported so far. Although early in the crop year, based on current crop condition of the main crop, the emphasis on rice farming, (intensification, inputs and extension) and area planted, paddy output in 1999/2000 is expected to reach the target of 51 million tonnes, (around 33 million tonnes of milled rice), from an area of around 11.6 million hectares. If this level of production materialises, it would represent around a 3 percent increase over the final, official, estimate of last year's production and would bring output in line with 1996/97 the last favourable year. (Chart 3)
Source: Ministry of Agriculture (1998 FAO/WFP estimate)
Improved prospects for rice production this year, therefore, are expected to stimulate further recovery in the rural economy and increase access of households to food.
Overall rice supplies are anticipated to remain satisfactory up to the harvest of the main paddy crop from March, with prices likely to remain competitive in view of imports and prospects of a reasonable harvest. Based on BULOG projections, closing stocks with the agency at the end of the current (1999/2000) marketing year (April/March) are forecast at around 1.1 million tonnes, compared to opening stocks of 2.3 million tonnes. In spite of projected BULOG imports of around 1.3 million tonnes in 1999/2000, the agency has, therefore, had to draw down around 1.2 million tonnes during the year.
In addition the Government in late 1998 allowed private imports of rice. As import prices, especially of lower quality grades (25 percent and AI) remained much lower than domestic prices through out 1999, in September private imports were restricted to 5 percent broken or above only to prevent further fall in domestic prices. (see Chart 4),
However, as imported rice, still remained cheaper and sizeable private imports continued in October and November, further depressing prices, at the end of 1999 the Government imposed a 30 percent tax on imported rice to prevent further falls. The import levy, which came into effect on 1 January 2000, will put an additional 430 rupiah on a kilogram of imported rice. In view of the levy it is understood that the restriction on the private sector importing lower than 5 percent broken quality rice has been lifted.
Total rice imports are indicated in Chart 5.
Notwithstanding the tremendous hardship the people of Indonesia, especially the poor, have had to endure over the last 2 years in coping with the dramatic change in economic fortunes and falling living standards, there are now emerging signs that the worst may be over. Since the later half of 1999, there have been positive and encouraging trends, with signs of greater economic stability. Indicators such as GDP, prices, the exchange and borrowing rates have showed steady improvement, which, in turn, will have a positive impact on consumer and investor confidence. This confidence will be essential to underpinning investment in key sectors, in particular agriculture which is seen as a priority, to increase productive employment, stimulate further economic recovery and, hence, food security.
This report is prepared on the responsibility of the FAO Secretariat
with information from official and unofficial sources. Since conditions
may change rapidly, please contact Mr. Abdur Rashid, Chief,
ESCG, FAO, (Fax: 0039-06-5705-4495, E-Mail (INTERNET): GIEWS1@FAO.ORG)
for further information if required.
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