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- IMF and deforestation in Indonesia Due to a prolonged economic crisis and the devaluation of the Indonesian Rupiah in early 1997, Indonesia was forced to seek aid from the IMF, and by the end of October a first assistance package was agreed upon. The US$43 billion financial rescue package included some structural adjustments or reforms stipulated in the Letter of Intent (LOI) that the government of Indonesia should follow. The then President Suharto signed the first LOI with the IMF in October1997, focussed on banking sector reform, but without including any reference to the forest sector or the environment. By early January 1998, the government of Indonesia had failed to implement the commitments of the first LOI and the country plunged into a deeper economic crisis. Despite the failures, a second LOI was negotiated and signed on January 15, 1998. The IMF announced that the second LOI would accelerate and broaden the earlier commitments to reform. The first major set of reforms affecting forests were contained in the IMF's January 1998 LOI with the Indonesian Government -the documents which spelled out the loan conditions Indonesia had to agree to secure a US$1 billion loan as part of a US$43 billion bail-out package. A striking addition to the first LOI was a series of forest-related (6 points) and other environmental measures (4 points). These included major commitments to “reduce export taxes on logs, sawn timber, rattan, and to impose appropriate resources rent taxes” (point 37) and to “remove restrictions on foreign investment in palm oil plantations” (point 39). Ironically, while the LOIs called for greater transparency and consultation with civil society, the process of drafting the agreements themselves was anything but transparent. The contents of the LOIs are still not made available for public scrutiny before signing. There is no wide participation by NGOs and especially by those most affected by the LOIs conditions. Through IMF’s LOIs packages, the World Bank steered the Indonesian government to implement the IMF recipes of its structural adjustment loans. LOIs became the ‘holy bible’ directing the country’s economy and its natural resource management policies. In 2002, WALHI/FOE Indonesia commissioned an independent study to evaluate the impact of the implementation of the LOIs on forests and the environment. The study was conducted by a team lead by a prominent forest economics expert of the Agriculture Institute of Bogor. The study concluded that the state budget for public expenditures in environmental management had decreased and that economic and trade liberalization had increased the exploitation of natural resources. Some findings of the study are summarised below. The log export liberalisation (point 37, LOI 1998) provided financial incentives for log export. Although reducing the export taxes on timber may have improved the price of the undervalued timber in Indonesia, which could lead to the improvement of the efficiency in the extraction of raw material and serve as an incentive to conservation efforts, this policy has in fact been catastrophic. The log export activity was encouraged but at the same time it increased the deficit of timber supply for the domestic wood processing industries. Ironically, despite the shortage of wood supply, the forest-based industry was even increased, especially production in the pulp and paper mills. As a result, the timber for the industry was supplied from illegal and unrecorded sources. Furthermore, since the timber supply from logging concessions decreased, the demand of the timber from conversion forests increased. The same trend basically happened with the policy of liberalisation of investment in the oil palm plantation sector (point 39). This policy has been matter of controversy since it was launched, because it was totally contradictory with the Bank’s and IMF’s commitment to reduce forest conversion in Indonesia. Removing restrictions on foreign investment in palm oil promoted a greater expansion of oil palm plantations at the expense of forests. Together with previous Indonesian government’s policy, this condition opened up the country for further forest conversion. According to the study, 80% of oil palm plantations was established by converting natural forests. Although improvements in some aspects of governance and transparency (for example calls for reform of concession regulations, introduction of performance standards and the dismantling of cartels) could clearly benefit both forests and government revenues, other objectives such as reducing export taxes on timber were just as likely to offset those gains. A commitment to halt forest land conversion was inconsistent with the removal of restrictions on the export of palm oil and on foreign investment in the sector -a move that was likely to accelerate the rate of forest conversion to plantations. The measures did nothing to address the underlying structural causes of deforestation and degradation. Since the 1997 economic collapse, the World Bank and IMF have played a direct role in decision-making affecting forests and forest peoples, as they press Indonesia to keep up with debt repayments. These institutions must accept joint responsibility for forest destruction and the resulting marginalisation of communities and start prioritising the needs of the poor over the interests of international finance. By
Longgena Ginting, WALHI /Friends of the Earth Indonesia, E-mail: ginting@foei.org |
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