NUSANTARA

LAPORAN
LAPORAN REPORT
NUSANTARA
NUSANTARA MAY
MEI2018
MEI 2018 2018
 ii
NUSANTARA REPORT MAY 2018
Regional Economic and Financial Review

NUSANTARA
REPORT
M AY 2 0 1 8

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NUSANTARA REPORT MAY 2018
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CONTENT Contents v

Foreword vi

Part I 1
OVERVIEW OF RECENT REGIONAL ECONOMIC DEVELOPMENTS
AND OUTLOOK

Part II 13
STRATEGIC ISSUES: INCREASING AGRICULTURAL PRODUCTIVITY THROUGH
IMPROVED INFRASTRUCTURE AND INSTITUTIONAL SUPPORT FOR FARMERS

BOX 1 23
REGIONAL UTILISATION AND REALISATION OF THE VILLAGE FUND

BOX 2 27
STRENGTHENING GOODS TRADE BALANCE THROUGH PRODUCTION
AND MARKETING OF COFFEE INDUSTRY IMPROVEMENT

BOX 3 31
DEVELOPMENT OF SUGAR INDUSTRY THROUGH INCREASED SUGARCANE
PRODUCTIVITY AND YIELD

BOX 4 35
RICE FARMING PERFORMANCE IMPROVEMENT STRATEGY

BOX 5 39
RED CHILLI FARMING PERFORMANCE IMPROVEMENT STRATEGY

BOX 6 43
INCREASING CACAO PRODUCTIVITY TO SUPPORT THE TRADE SURPLUS

BOX 7 47
EFFORTS TO BOOST FISHERIES PRODUCTION

BOX 8 51
CASE STUDY: THE IMPORTANCE OF INSTITUTIONAL SUPPORT FOR FARMERS

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NUSANTARA REPORT MAY 2018
FOREWORD
P
olicy making at Bank Indonesia takes into account
various economic dynamics and the latest issues
developing in Indonesia. Furthermore, the
Bank Indonesia Board of Governors regularly
discusses the latest emergent economic dynamics
and issues from a regional perspective, the results of
which underlie policymaking at Bank Indonesia and are
effectively communicated to all stakeholders through the
Nusantara Report published quarterly. The Nusantara
Report is compiled in conjunction with the Economic
and Monetary Policy Department (DKEM), Regional I
Department (Sumatra), Regional II Department (Java) as
well as the Regional III Department (Eastern Indonesia).

The national economy of Indonesia maintained robust

growth in the first quarter of 2018, reaching 5.06% (yoy).
Economic growth has accelerated on the same period
one year earlier but is down historically on that posted in
the fourth quarter of 2017. Regionally, Java and Eastern
Indonesia were the main drivers of growth in the first
quarter of 2018, while solid growth moderated in Sumatra.

Based on recent assessments, Bank Indonesia projects

the ongoing domestic economic recovery to persist into
the second quarter of 2018, driven by Java and Sumatra,
on the back of household and government consumption
as well as exports. In general, economic growth in all
regions of the archipelago is projected to accelerate in
2018, bringing the aggregate total to around 5.1%-5.5%.
Solid domestic demand and increasing investment are
expected to stimulate economic performance in 2018,
backed by macroeconomic stability and the ongoing
global economic recovery.

As an aggregate, regional CPI inflation remained under

control in the first quarter of 2018 and within the
target corridor. Compared with conditions at the end
of 2017, inflation slowed during the first three months
of 2018, supported by milder inflationary pressures on
administered prices (AP) and stable core inflation. In
contrast, volatile food inflation tended to accelerate.

vi
NUSANTARA REPORT MAY 2018
Entering the second quarter of 2018, CPI inflation in
various regions is predicted to increase, edged up by
volatile foods (VF) as price pressures build on shallots
as well as purebred chicken meat and eggs. Moving
ahead, inflationary pressures on volatile foods (VF) will
demand increased vigilance in line with the cyclical spike
in demand observed during the holy fasting month of
Ramadan and Eid-ul-Fitr. Nevertheless, Bank Indonesia
projects a lower level of CPI inflation in 2018 compared
with conditions in 2017, remaining within the national
inflation target of 3.5±1%.
In addition to the latest economic developments, this edition
of the Nusantara Report raises the salient issue of “Boosting
Agricultural Output through Improved Infrastructure and
Institutional Support for Farmers”. This issue was raised
because increasing agricultural productivity would not
only strengthen domestic food supply but also support the
availability of raw materials for upstream agribusinesses, while
stimulating agricultural exports to help reduce the current
account deficit, thereby attaining solid, sustainable, balanced
and inclusive growth.
Jakarta, May 25th 2018
Economic and Monetary Policy Department
Aida S. Budiman
Executive Director
vii
NUSANTARA REPORT MAY 2018
Nonetheless, several challenges to increasing
agricultural productivity must first be overcome,
including (i) current infrastructure conditions, both
in terms of connectivity and irrigation; (ii) business
scale and technology uptake, on-farm and off-farm;
and (iii) HR quality in the agricultural sector. To that
end, the Government has already accelerated the
development of supporting infrastructure for the
agricultural sector, expanded the access to and quality
of production inputs, as well as improved institutional
aspects for the farmers, while broadening access to
agricultural information. In this edition, the various
policies, potentials and challenges to strengthening
the agricultural sector are explored, which will help to
reduce the current account deficit.
In closing, I sincerely expect the Nusantara Report to be
used as a reference to the benefit of all stakeholders
and regional economic observers, while serving as
a valuable Bank Indonesia contribution to regional
economic development.
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NUSANTARA REPORT MAY 2018
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NUSANTARA REPORT MAY 2018
PART 1

OVERVIEW OF RECENT
REGIONAL ECONOMIC
DEVELOPMENTS AND OUTLOOK

Halaman ini sengaja dikosongkan

1
NUSANTARA REPORT MAY 2018
 PART 1

OVERVIEW OF RECENT REGIONAL

ECONOMIC DEVELOPMENTS AND OUTLOOK

Recent Regional Economic non-building investment, along with consumption by

Developments non-profit institutions serving households (NPISH) as
activities were ramped up in anticipation of the local
Economic Developments in the First Quarter of
elections to be contested in 2018. Most economic
2018
sectors posted stronger growth in the reporting period,
Indonesia’s national economy achieved solid growth led by the Mining and Quarrying sector. Regionally,
in the first quarter of 2018, reaching 5.06% (yoy). Java and Eastern Indonesia were the key contributors
Domestic economic growth accelerated compared to national economic growth, contrasting slower
with conditions in the same period one year earlier but growth in Sumatra. In Eastern Indonesia, Bali and
moderated on the previous period (Figure I.1). Investment Nusa Tenggara as well as Maluku and Papua helped to
was the main driver of economic growth, particularly stimulate growth.

NATIONAL
Aceh 5,19
3.34 5,01 5,01 5,06 5,06

North Sumatera North Kalimantan

4.73 5.56
I’17 II’17 III’17 IV’17 I’18
Gorontalo North Sulawesi
Riau 6.19 6.68
2.91 Riau Islands East Kalimantan
4.47 West Kalimantan 1.77
West Sumatra 5.11 West Papua
Central North Maluku
4.71 Sulawesi 6.69
Jambi Bangka Belitung 7.98
4.66 Islands Central Kalimantan 6.62
2.46 4.62 West Sulawesi
South Sumatra South Kalimantan 5.65
Bengkulu 5.89 Papua
5.08 5.01 South-east
Lampung South Sulawesi Sulawesi 28.93
Maluku
5.16 7.41 5.76 5.25
Jakarta
6.02
Central Java
Banten West Java 5.41
6.02 Bali
5.95 East Java 5.68
Yogyakarta 5.50
5.36
East Nusa Tenggara
West Nusa Tenggara 5.19
-0.33

Java (58,5%) Sumatera (22%) Kalimantan (7,9%) Sulawesi (6%) Mapua (2,5%) Bali Nusra (3,1%)
4.45 4.43 4.37 18.42
5.69 5.68 5.62 5.78 4.14 4.17 4.97 4.42 4.62 7.53
5.47 3.37 3.25 6.93 6.93 6,83
6.55 4.40 5.31 4.39 5.42 2.93 3.38 2,47 3,24 5,24

I’17 II’17 III’17 IV’17 I’18 I’17 II’17 III’17 IV’17 I’18 I’17 II’17 III’17 IV’17 I’18 I’17 II’17 III’17 IV’17 I’18 I’17 II’17 III’17 IV’17 I’18 I’17 II’17 III’17 IV’17 I’18

PDRB ≥ 7,0% 6,0% ≤ PDRB < 7,0% 5,0% ≤ PDRB < 6,0% 4,0% ≤ PDRB < 5,0% 0% ≤ PDRB < 4,0% PDRB < 0%

Note: Numbers in parantheses (...) represents the share of regional GDP to to National GDP

Source: BPS-Statistics Indonesia, BI staff

Figure I.1. Regional Economic Growth Map in Q1/2017 (%, yoy)

2
NUSANTARA REPORT MAY 2018
The majority of Indonesia’s provinces continued
to expand in excess of 5% (yoy) . Compared with
1
economic dynamics in the same period one year earlier,
19 of the 34 provinces posted economic gains, led by
Papua at 28.93% (yoy). Compared with conditions in
the previous period, however, 20 of the 34 provinces
experienced economic moderation, with
Sulawesi hardest hit as growth decelerated from 9.15%
(yoy) to 6.62% (yoy), held back by the Manufacturing
Industry and Mining Sector. In contrast, Papua posted
the strongest gains, accelerating significantly from
4.78% (yoy) to 28.93% (yoy) on the back of Mining
Sector performance.
Java’s economy achieved faster growth in the
first quarter of 2018 compared with the previous
period. Java’s economy expanded at 5.78% (yoy) in
the first quarter of 2018, up from 5.62% (yoy) in the
fourth quarter of 2017 and buoyed by all provinces on
the island except East Java. The gains came amidst a
stronger net export position, increasing household
consumption and accelerating consumption by non-
profit institutions serving households (NPISH). Net
exports were edged up by shipments of iron and
steel as well as textiles and textile products on rising
demand from Indonesia’s major trading partners,
including China, United States, European Union
and Japan. On the other hand, households enjoyed
increasing purchasing power, especially amongst
low-income earners, as the Government expanded
the coverage and allocation of its social expenditure
program through the Family Hope Program (PKH),
which catalysed household consumption. By economic
sector, the Manufacturing Industry and Trade Sector
were key drivers of Java’s economic gains. Production
at large and medium manufacturing firms in Java
was increased in anticipation of the seasonal spike in
demand during the holy fasting month of Ramadan
and Eid-ul-FitrEid al-Fitr. Meanwhile, the Trade Sector
benefitted from increasing household consumption
and public purchasing power, coupled with controlled
inflation.
National economic growth was also underpinned
by Eastern Indonesia, where growth was observed
1
In the first quarter of 2018, 20 out of 34 provinces achieved growth above 5% (yoy).
NUSANTARA REPORT MAY 2018
to accelerate from 4.85% (yoy) in the fourth quarter of
2017 to 6.20% (yoy) in the first three months of 2018.
Spatially, economic expansion in Eastern Indonesia
was driven by Mapua and Balinusra, contrasting
the economic moderation reported in Sulawesi
and Kalimantan. Stronger exports and increasing
Central government consumption were the main contributors
to economic growth in Eastern Indonesia, together with
solid household consumption. Exports from the region
were elevated by consignments of mining concentrates
after Papua’s export quota was reinstated, as well as by
nickel exports after restrictions were relaxed on lower
quality nickel pig iron (NPI) production in North Maluku.
Exports from Eastern Indonesia were also restored as
export activity returned to normal in Balinusra after the
Mount Agung eruption on Bali, which severely impeded
activities in the previous period. Furthermore, the export
gains achieved in Balinusra and Mapua effectively offset
declining coal exports from Kalimantan due to dwindling
demand from India. By economic sector, the key drivers
of economic growth in Eastern Indonesia were mining
as well as trade and accommodation. The mining sector
successfully increased production of copper concentrate
and gold in Papua, while bringing new ferronickel
smelters online in North Maluku. On the other hand,
trade and accommodation activities normalizsed after
tourism recovered in Balinusra in the wake of the Mount
Agung eruption.
Solid economic growth was maintained on the island
of Sumatra, despite slight moderation compared with
conditions in the previous period. Sumatra’s economy
expanded at 4.37% (yoy) in the reporting period, down
from 4.43% (yoy) at the end of 2017. Most provinces on
Sumatra contributed to the slowdown, except for Riau,
Riau Islands and Bengkulu, where economic growth
continued to accelerate. The economic downswing on
Sumatra was caused by declining international exports
and government consumption. Slower international
exports were attributed to the major commodities,
such as crude palm oil (CPO), rubber, coffee and lead,
compared with conditions in the same period one year
earlier. Moreover, CPO exports were also hit by import
restrictions imposed in India together with dwindling
demand from China due to a large soybean oil inventory.
3
Departing from conditions found in the other
regions, investment on Sumatra accelerated in the
first quarter of 2018. Investment was boosted by the
completion of projects in preparation for the Asian
Games in Palembang and non-building investment,
primarily in machinery and vehicles. On top of robust
investment, household consumption on Sumatra also
increased due to stronger public purchasing power,
especially amongst low-income households, as the
Government expanded the coverage and allocation
of its social assistance program through the Family
Hope Program (PKH). By economic sector, downside
pressures on agricultural performance precipitated
economic moderation on Sumatra. In the reporting
period, palm oil plantations entered the trek season,
which saw production plummet2. Furthermore, high
rainfall also decreased horticultural productivity,
including red chilli, and reduced fresh water fish
catches. Nonetheless, Mining Sector performance
improved on rising coal prices and the Construction
Sector was buoyed by government infrastructure
projects, which offset further moderation on Sumatra,
thereby maintaining solid regional economic growth.
Tracking the Economy in the Second Quarter of
2018
The economic gains are expected to persist into
the second quarter of 2018, backed by household
consumption, government consumption
improving export performance. Regionally, growth in
Sumatra, Java, Kalimantan and Balinusra are predicted
to contribute to the national economy. Household
consumption is expected to tick upwards in all regions
as phase II of the government’s social disbursement
program commences, coupled with the cyclical spike in
demand during Ramadan and Eid-ul-Fitr. Furthermore,
government consumption is predicted to increase in
most regions, heightened by disbursements of annual
Eid-ul-Fitr allowances and 13-month salaries for civil
servants, disbursement of the operating budget
for the local elections to be contested nationwide
2
In general, the trek season begins three months after the culmination of the monsoon season, when there is not enough rainfall
to support growth.
NUSANTARA REPORT MAY 2018
simultaneously in 2018, disbursement of the phase
II village fund program as well as realisation of trade
and services procurement for the state budget.
Implementation of the phase II village fund program
should also have a propitious impact on local economies
in Indonesia (refer to Box 1). In addition, international
exports are forecasted to pick up, particularly from
Sumatra, Kalimantan, Java and Balinusra. The main
export drivers in Sumatra and Kalimantan will be crude
palm oil (CPO) and coal in line with rising commodity
prices and growing coal demand from India, Taiwan
and China. The accelerating trend of exports from Java
will mainly stem from the automotive industry, while
in Balinusra, the tourism recovery should underpin
services exports. All regions are expected to maintain
solid investment performance despite moderating
on the previous period. New infrastructure project
realisation, which slowed in the first quarter of 2018,
should improve in the second quarter of 2018, including
the realisation of capital spending in the state budget.
Nevertheless, the wait-and-see attitude of investors
during the run-up to the local elections will continue to
affect private investment (Table I.1).
By economic sector, the gains predicted in
the second quarter of 2018 will be supported
by improvements in the Agricultural Sector,
Manufacturing Industry as well a Trade Sector in
and all regions. Food and horticultural crop harvests in
Sumatra will induce agricultural sector performance,
along with increasing production of fresh fruit bunches
and larger fish catches in line with more conducive
weather conditions. Meanwhile, in Java and Sulawesi,
the food crop harvesting seasons have been pushed
back from March to April, which will prop up second
quarter performance. On the other hand, the trade
sector will utilise the seasonal spike in demand during
Ramadan and Eid-ul-Fitr to boost sales in all regions,
which will also serve to strengthen manufacturing
industry performance, particularly the food and
beverages industries.
4
 Table I.1. Regional Economic Growth Trends in Q2/2018*

GDP SUMATERA JAVA EASTERN INDONESIA

National
Components Trend Assessment Trend Assessment Trend Assessment

Driven by consumption and Driven by consumption and Driven by consumption and investment,
Economic export, slower investment export, slower investment slower export growth.
Growth growth growth.

Household Demand increase during Demand increase during Demand increase during Ramadhan and
Ramadhan and Idul Fitri. Ramadhan and Idul Fitri. Idul Fitri.
Consumptio

Government budget are
projected to be disbursed for
Regional Election, Village Fund,
Program Keluarga Harapan
(PKH) and Bantuan Pangan
Government Non Tunai (BPNT), and holiday
allowance and 13th salary
Consumption for government employees.
Most regional government
budget has been confirmed
and validated, ready to be
disbursed.
Government budget are
projected to be disbursed
for Regional Election,
Village Fund, Program
Keluarga Harapan (PKH)
and Bantuan Pangan Non
Tunai (BPNT), and holiday
allowance and 13th salary
for government employees.
Most regional government
budget has been confirmed
and validated, ready to be
disbursed.
Government budget are projected to be
disbursed for Regional Election, Village
Fund, Program Keluarga Harapan (PKH)
and Bantuan Pangan Non Tunai (BPNT),
and holiday allowance and 13th salary for
government employees. Most regional
government budget has been confirmed
and validated, ready to be disbursed.

New private investment Several infrastructure projects Completion of government infrastructure

Investment projects currently are still in the
administration process, and
(Gross Fixed some will need to wait until
Capital regional elections are finished.
Long holidays potentially slow
Formation) down the completion of on
going infrastructure projects.
are already in the finishing
stage, i.e. Kertajati Airport,
Pejagan-Malang Toll Road,
& Asian Games Venue. New
investment projects are
predicted to be limited during
Ramadhan and Idul Fitri.
projects are going to be accelerated,
especially projects related to the IMF-WB
Annual Meeting in Bali, which will also
lead to government capital expenditure
increase. However, private investment are
predicted to be limited during the regional
election.

CPO production and
international coal price are
projected to increase. Lead
International export from Babel is expected
Export to continue after government
regulations related to mineral
export has been synchronized
in April 2018.
Export service activities
(port services, customs)
are expected to continue
as usual during Idul Fitri
holidays. Automotive export is
projected to go up.
International trading partner’s PMI are
projected to decline. Mineral export
quota has run out as export was front
loaded in Q1 2018. International prices
of lead, nickle, and coffee are expected
to be slightly lower than Q1 2018.

Rupiah depreciation are
expected to hinder import.
International Capital goods import is
projected to be limited as
Import
current production capacity is
still adequate
Increase in export and
domestic consumption are
expected to drive import of
consumption goods and raw
materials.
Capital goods import is expected to
increase to support infrastructure
projects. Machine and tools imports are
also expected to increase as palm oil
refinery construction takes place..

*Annual (year on year) growth trends

Note : Green (positive contribution to GDRP growth), red (contributes negatively to regional GDP)

Regional Financial Stability
Corporate Sector Resilience
Consonant with the gradual economic recovery,
non-financial corporate performance demonstrated
limited gains as of yearend 2017. Such developments
were confirmed by rising profitability and productivity
ratios, coupled with stable short and long-term
corporate repayment capacity. On the other hand, the
corporate sector continued to consolidate by avoiding
additional debt, as reflected in a relatively stable debt-
to-equity ratio. Nonetheless, a build-up of corporate
cashflow risk was reported in terms of servicing short-
term debt obligations, as corroborated by a rising debt
service ratio (DSR), affecting corporations located in
Java, Sumatra and Eastern Indonesia (Graph I.1).

5
NUSANTARA REPORT MAY 2018
Source: Corporate Financial Reports at the Indonesia Stock Exchange, Bloomberg
Graph I.1. ROA, ROE, DSR and DER by Region
Corporate resilience in various regions remained
solid upon entering the first quarter of 2018.
Congruent with stronger manufacturing
performance in Java, the performance of major
corporations, primarily engaged in the freight, textile,
paper and base metal industries, also improved.
Similarly, mining and manufacturing firms in Sumatra
also posted gains as both sectors accelerated in the
reporting period. In contrast, corporate performance in
the agricultural sector tended to slump.
Graph I.2. NPL Ratio of Corporate Loans by Region
The uptick observed in corporate performance was
also substantiated by faster growth of outstanding
loans disbursed by the banking industry to the
corporate sector3. As an aggregate, corporate loan
growth accelerated from 7.28% (yoy) in the fourth
3
Corporate loans are credits disbursed to businesses.
NUSANTARA REPORT MAY 2018
quarter of 2017 to 7.71% (yoy) in the first quarter of 2018.
By region, stronger growth of outstanding bank loans
industry extended to the corporate sector was reported in Sumatra,
Sulawesi, Balinusra and Mapua, contrasting the slower
growth recorded in Java and Kalimantan. Furthermore,
the banking industry contained the NPL ratio of corporate
loans below the 5% threshold, despite increases reported
in several regions.
Household Sector Resilience
In line with persistently solid household consumption,
the banking industry confirmed stronger growth of
household loans while effectively mitigating the risks.
Loans allocated to the household sector grew by 11.33%
(yoy) in the first quarter of 2018, up from 10.92% (yoy) in
the fourth quarter of 2017. The gains affected all regions,
except Java, and were driven by housing loans, automotive
loans and multipurpose loans. Furthermore, faster
household loan growth was accompanied by maintained
credit quality, with the banking industry containing the
corresponding NPL ratio below the 5% threshold despite
tracking an upward trend.
Payment System and Rupiah
Currency Management
Financial transactions through the RTGS and National
Clearing systems accelerated in the reporting period.
The value of transactions settled through the Bank
Indonesia – Real Time Gross Settlement (BI-RTGS) system
6
grew 6.85% (yoy) in the first quarter of 2018, up from regionally. Such dynamics reflected a surge of outflow
3.14% (yoy) in the previous period, to a total of Rp30,905 transactions from Bank Indonesia during the first quarter
trillion. In terms of volume, RTGS transactions grew by of 2018, accelerating from 0.12% (yoy) in the previous
58.01% (yoy) or 2.67 million transactions in the reporting period to 26.55% (yoy). The increase was reported in all
period, increasing from 57.24% (yoy) in the fourth regions, including Sumatra, Java and Eastern Indonesia,
quarter of 2017. Consistent with recent RTGS dynamics, in line with broad-based growth during the reporting
the flow of transactions through the National Clearing period.
System (SKNBI) also improved. In terms of value, despite
still contracting by -3.5% (yoy), recorded at Rp860 trillion,
Inflation
the contraction was shallower than the -6.11% (yoy) As an aggregate, regional inflationary pressures
registered in the previous period. Transaction volume eased in the first quarter of 2018 compared with
settled through the National Clearing System contracted conditions at the end of 2017. Spatially, milder
by -7.90% (yoy) or 23.4 million transactions, improving inflationary pressures were reported in Java, Kalimantan,
from -11.24% (yoy) in the fourth quarter of 2017. The Sulawesi and Balinusra, contrasting the upward trends
negative annual growth rate affecting the National in Sumatra and Mapua (Figure I.2). At the end of the first
Clearing System was attributed to temporary switching quarter of 2018, annual inflation in all regions remained
by the public when choosing to use RTGS or SKNBI within the inflation target for 2018 at 3.5±1%, with the
depending on the amount of funds to be transferred. Riau Islands as the only exception (5.05%) due to rising
prices of red chilli and rice coupled with higher electricity
Currency Outside Banks (COB), as a measure of cash
rates.
transaction activity, was also observed to increase

NATIONAL
3.61
Aceh
3.98 3.40 3.41

North Sumatra North Kalimantan

4.43 2.20
Gorontalo 2017 Tw I-18 Apr-18
Riau Islands 2.83
Riau 4.35 North Sulawesi
3.62 East Kalimantan 2.24
West Kalimantan 2.76
West Sumatra 3.30
West Papua
2.66
Jambi Bangka Belitung Central Sulawesi North Maluku 2.49
3.01 3.54
3.79 Islands Central Kalimantan
2.57 2.55 West Sulawesi
South Sumatra 2.80
Bengkulu 3.71 South Kalimantan Papua
3.76 2.90 South-east Maluku 3.05
Lampung Sulawesi 0.88
South Sulawesi 2.52
3.42 Jakarta 3.54
3.32
Central Java
Banten West Java 3.23 Bali
3.80 3.69 East Java 3.24
Yogyakarta 3.06
3.11
West Nusa Tenggara East Nusa Tenggara
3.65 1.97

Java Sumatera Kalimantan Sulawesi Mapua Bali Nusra

3.78 3.82 3.45 3.94 3.20
3.47 3.70 2.81 2.85 2.99 3.12 2.16 2.33 3.15
3.42 1.53
3.30 3.01

2017 Tw I-18 Apr-18 2017 Tw I-18 Apr-18 2017 Tw I-18 Apr-18 2017 Tw I-18 Apr-18 2017 Tw I-18 Apr-18 2017 Tw I-18 Apr-18

Inf ≥ 4,5% 3,5% ≤ Inf < 4,5% 2,5% ≤ Inf < 3,5% Inf < 2,5%

Source: BPS-Statistics Indonesia, processed

Figure I.2. Regional Inflation Map, April 2018 (yoy)

7
NUSANTARA REPORT MAY 2018
Inflation was effectively controlled within
inflation target due to lower inflationary pressures
on administered prices (AP) combined with stable
core inflation. Lower AP inflation was attributed to the
Government’s decision to avoid further hikes in the non-
subsidised electricity rate for 900VA subscribers since
July 2017 and to also avoid raising the vehicle registration
renewal fees as occurred at the beginning of 2017. On a
quarterly basis, airfares continued to deflate as demand
returned to normal after the spike reported at Christmas
and New Year. Core inflation was relatively stable in line
with maintained domestic demand, anchored inflation
expectations as well as minimal upside pressures
on mobile phone tariffs, contrasting dynamics at the
beginning of last year.
Accelerating volatile food (VF) inflation in all regions
offset disinflation in the first quarter of 2018. Rising
prices of rice and red chilli edged up VF inflation in various
regions. Rice prices increased due to the ongoing planting
season to meet demand during the main harvest in March-
June 2018. On the other hand, heavy rainfall undermined
red chilli productivity, which pushed up prices.
Entering the second quarter of 2018, a build-up of
inflationary pressures was reported in all regions,
especially outside of Java. Regionally, the highest
inflation rate in April 2018 was recorded in Sumatra
(3.82%), followed by Java (3.42%), Balinusra (3.15%),
Sulawesi (3.12%), Kalimantan (2.85%) and Mapua (2.33%).
More than half of the provinces in Indonesia registered
higher inflation compared with conditions at the end
of the first quarter but the rates were still all controlled
within the national inflation target of 3.5±1%.
The build-up of inflationary pressures in most
provinces was triggered by volatile foods (VF),
particularly shallots as well as purebred chicken meat
and eggs. Shallot prices were elevated by limited supply
due to the ongoing planting season in various production
hubs coupled with tenacious demand. On the other hand,
strong seasonal demand before Ramadan pushed up the
prices of purebred chicken meat and eggs, with rising
prices expected to persist until the end of the holy fasting
month.
4
Realised garlic imports from January – March 2018 were recorded at 23,347 tons (Source: Customs, processed).
NUSANTARA REPORT MAY 2018
the Notwithstanding, price corrections to rice, bird’s eye
chilli and red chilli offset inflationary pressures at the
beginning of the second quarter of 2018. Harvests in
nearly all the main production centres (West Java, East
Java, Central Java and South Sulawesi) deflated the prices
of rice in March and April, while chilli prices were supressed
by harvests in several production centres, including
Garut, Cianjur, Magelang, Temanggung, Wonosobo,
Blitar, Lamongan, Tuban, Kediri, Malang, Simalungun,
Tanah Datar, Rejang Lebong, Buleleng and East Lombok.
Similarly, additional imported supply helped to lower
garlic prices. Furthermore, garlic imports are expected
to continue increasing after the Government raised the
import quota.4
Moving forward, the prices of various food commodities
will demand increased vigilance in line with the
cyclical spike in demand during Ramadan and Eid-ul-
Fitr. Based on monitoring activities by the Strategic Food
Price Information Centre (PIHPS) through to the middle
of May 2018, the commodities most susceptible to higher
prices include purebred chicken eggs and meat, beef and
cooking oil. On the other hand, the prices of commodities
popular for seasoning, such as shallots, red chilli, bird’s
eye chilli and garlic were observed to decrease.
Regional Economic Outlook and
Challenges
Economic Outlook for Third Quarter of 2018
Economic moderation is expected in all regions in
the third quarter of 2018 as a result of household
consumption and international exports.
Nevertheless, faster investment growth and increasing
government consumption is expected to negate further
economic declines. Solid household consumption growth
is expected to persist, albeit slower in all regions as public
demand returns to normal in the wake of Ramadan and
Eid-ul-Fitr. Restrained international exports from Sumatra
are projected, held back by price pressures on major
export commodities, including coal, as well as the base
effect of strong exports from Java in the third quarter of
2017. Nonetheless, further export declines will be offset
by improving exports predicted from Eastern Indonesia
8
as the peak season for international travellers visiting
Indonesia approaches, combined with the Annual IMF-
World Bank Meeting being held in Bali as well as the
base effect of the export contraction in Mapua. On the
other hand, government consumption is expected to
soar when hosting the Asian Games in Java and Sumatra,
particularly affecting Jakarta, West Java and Palembang.
In addition to government consumption, investment is
also expected to increase on the back of government
infrastructure projects and private investment after the
results of the local elections have been announced.
By economic sector, moderating household
consumption and export growth will be felt mostly
in the mining sector, manufacturing industry and
trade sector. On the other hand, the agricultural
and construction sectors are expected to offset the
economic slowdown predicted in the third quarter of
2018. The agricultural sector will flourish on harvests of
horticultural products, including honey at production
hubs primarily located on Java. Meanwhile, the
construction sector will be buoyed by infrastructure
project realisation in Eastern Indonesia and Java.
Economic Outlook for 2018
National economic growth in Indonesia is projected
to accelerate in the 5.1-5.5% (yoy) range in 2018.
Spatially, all regions are expected to drive national
economic growth, originating mostly from stronger
domestic demand against a backdrop of muted
export growth. By sector, the manufacturing industry,
construction sector and trade sector are forecasted as
the key contributors of economic growth in 2018.
Java’s economy is projected to expand in the
5.5-5.9% range in 2018. The regional economy
will be supported by household consumption,
government consumption, investment and exports.
Investment will accelerate towards completion of
several multiyear government infrastructure projects,
including supporting infrastructure for the venues of
the Asian Games. Export performance is also expected
to rebound to fuel stronger economic growth in
Indonesia’s major trading partners, together with efforts
9
NUSANTARA REPORT MAY 2018
to diversify the automotive export market. Investment
and exports will edge up household consumption,
in addition to the local elections and Asian Games.
By sector, economic acceleration on Java in 2018 will
rely on the manufacturing industry, agriculture and
trade. Increasing domestic and global demand will
be a boon to the manufacturing industry, especially
when combined with government efforts to enhance
national industrial competitiveness. Furthermore,
the agricultural sector is expected to improve as the
climate returns to normal after experiencing El Nino
and La Nina weather phenomena from 2015-2017 that
wreaked havoc on production. Finally, the trade sector
should gain traction in line with increasing household
consumption and exports.
Economic growth on Sumatra is predicted to improve
compared with conditions in 2017, reaching 4.2-4.6%
in 2018. Household and government consumption will
be the foremost drivers of growth in line with hosting
the 2018 Asian Games and contesting local elections
nationwide. Nevertheless, export growth is predicted
to decline on conditions in 2017 due to softer prices
of export commodities such as crude palm oil (CPO)
and rubber. By sector, agriculture, the manufacturing
industry and trade will prop up economic growth
on Sumatra. Food crop production is set to return to
normal in line with weather conditions more conducive
to regular planting patterns, while the manufacturing
industry will be supported by increasing production
of refined and processed products as new smelters
begin operating. Finally, the trade sector will be a key
beneficiary of stronger domestic demand.
The economy of Eastern Indonesia is expected to
build momentum in 2018, with growth projected
in the 5.1-5.5% range. Household consumption,
investment and exports are expected as the key
regional drivers of growth. Investment performance
will be supported by the quicker realisation of
government connectivity infrastructure projects,
ongoing development of the downstream mining
industry as well as increasing smelter production
capacity. Export growth will primarily stem from
mineral exports from Papua and West Nusa Tenggara
after the government extended the export permits
for copper concentrate. Increasing investment and
exports will feed through to higher incomes, thus
boosting household consumption. By sector, mining,
construction and trade will drive the economy of
Eastern Indonesia. Like exports, mining will benefit
from the government extending export licenses for
copper concentrate. Furthermore, infrastructure
development by the Government combined with
development of the downstream mining industry
will induce construction sector activities. Finally, the
trade and accommodation sector will be influenced by
an increase in the number of international travellers
visiting Indonesia along with a surge in MICE activities
(Meetings, Incentives, Conferences and Exhibitions),
the largest of which is the IMF-World Bank Annual
Meeting for 2018 to be held in Bali.
Notwithstanding, there remain a number of risks
that could potentially restrain national economic
growth in 2018. Externally, the potential risk of
monetary policy normalisation in several advanced
economies could lessen non-resident capital inflows to
Indonesia. In the medium term, China’s policy to switch
energy sources could certainly erode mineral exports,
especially coal. In addition, any furtherance of the trade
war developing between the US and China could subdue
international exports from various regions of the
archipelago. Similarly, import restrictions imposed by
India on crude palm oil (CPO) products from Indonesia,
which are exacerbated by soft CPO prices, could be
detrimental to CPO producing regions of Indonesia. At
home, the risks include the upcoming local elections
to be contested nationwide, which may undermine
government and private investment in infrastructure
projects. In addition, the Government’s infrastructure
development agenda requires the backing of adequate
budget planning.
Inflation Outlook for 2018
Inflation is projected to decelerate in 2018, with the
national inflation target set at 3.5±1%. Disinflation in
2018 will stem primarily from administered prices (AP),
10
NUSANTARA REPORT MAY 2018
after the Government agreed not to raise electricity
rates for 900VA subscribers in 2018 or adjust other
electricity tariffs. In contrast, core inflation and
inflationary pressures on volatile foods (VF) are
expected to accumulate in 2018 but remain under
control. The rising global oil price and strong domestic
household consumption are expected to edge up core
inflation. In addition, the global oil price will also push
up the prices of special fuels and airfares. In terms of
volatile foods (VF), the main sources of inflationary
pressures will be rice and horticultural produce, which
will demand vigilance.
The National Inflation Task Force (TPIN) has already
laid out a policy strategy to mitigate inflation risk
in 2018. Centrally, five strategic measures have been
agreed to control inflation in 2018 as follows: (i) control
inflationary pressures on volatile foods (VF) in the
maximum 4-5% range by maintaining food supply; (ii)
regulate the magnitude and timing of adjustments to
administered prices (AP), while controlling the potential
knock-on effects; (iii) strengthen coordination between
the Central Government, Regional Administrations
and Bank Indonesia, amongst others through a
Coordinating Meeting on Controlling Inflation in 2018;
(iv) enhance data quality underlying policymaking; and
(v) optimise Bank Indonesia’s policy mix to maintain
macroeconomic stability.
The policy strategy to control inflation in 2018
also cascades down to the local level through the
Regional Inflation Task Forces (TPID). To control
volatile food (VF) inflation in the 4-5% range in 2018,
the Regional Inflation Task Forces (TPID) will prioritise
the following:
a. Managing intertemporal food production in each
respective region;
b. Bolstering government food stocks and managing
market operation governance in conjunction with
the Indonesian Bureau of Logistics (Bulog);
c.
Enhancing production management by
strengthening corporate/cooperative farming,
managing production and post-harvest handling,
 especially in terms of drying and warehousing as Nevertheless, several constraints to enhancing
well as marketing; agricultural productivity must be overcome. The
challenges include: (i) inadequate connectivity and
d. Improving rice quality and yields by improving milling
irrigation infrastructure; (ii) increasing business scale
techniques;
and technology uptake, on-farm and off-farm; and (iii)
e. Disbursing timely and quality Rastra Social Assistance improving HR quality in the agricultural sector. Those
and Noncash Food Assistance; constraints must be overcome in order to develop
f. Developing an accurate production data system for potential agricultural commodities in each region, for
food commodities; and example coffee and sugar in Sumatra (refer to Box 2 and
3), chilli and rice in Java (refer to Box 4 and 5), as well as
g.
Facilitating synergy between the farmers and
cocoa and fish in Eastern Indonesia (refer to Box 6 and
downstream industries.
7). By overcoming the various challenges, in the long
Future Challenges term, efforts to improve the agricultural sector should
translate into a stronger current account structure as
Increasingly dynamic external and domestic
well as sustainable national economic growth. (Refer
conditions demand strategic and directed efforts
to Part 2: Strategic Issues: Increasing Agricultural
to strengthen the structure of the national
Productivity Through Improved Infrastructure and
economy and maintain sustainable economic
Institutional Backing for The Farmers).
growth. Strengthening the current account structure
will provide more space to achieve sustainable national
economic growth. Over the past three years, the
current account deficit has narrowed and remained
consistently below 3% of GDP.

The agricultural sector plays a key role in terms of

maintaining current account performance. In 2017,
the current account deficit was controlled at 1.7%
of GDP, equivalent to USD17.53 billion. The narrow
current account deficit was supported by a significant
non-oil and gas trade surplus, with agricultural produce
contributing a large USD32.61 billion surplus, backed
by strong exports from upstream agri-businesses,
particularly crude palm oil (CPO).

Further agricultural development is required to

support the sector’s net trade surplus. Considering
the vast agricultural potential available in Indonesia, the
opportunity to expand the trade surplus of agricultural
produce also remains vast, especially livestock, food
crops and horticulture that are currently experiencing
a trade deficit. This could be achieved by improving
agricultural productivity to boost agricultural exports,
supporting the supply of raw materials for upstream
agri-businesses, as well as strengthening domestic
food supply and distribution.

11
NUSANTARA REPORT MAY 2018
 “Blank page”

12
NUSANTARA REPORT MAY 2018
PART 2

STRATEGIC ISSUES: INCREASING

AGRICULTURAL PRODUCTIVITY
THROUGH IMPROVED
INFRASTRUCTURE AND
INSTITUTIONAL SUPPORT FOR
FARMERS

13
NUSANTARA REPORT MAY 2018
 PART 2

STRATEGIC ISSUES: INCREASING AGRICULTURAL

PRODUCTIVITY THROUGH IMPROVED
INFRASTRUCTURE AND INSTITUTIONAL SUPPORT
FOR FARMERS
Increased agricultural productivity would help to achieve a current account surplus. In 2017, agricultural
commodities, both primary and upstream agribusinesses, contributed a USD32.61 billion trade surplus in the
current account. The trade surplus stemmed primarily from the plantation subsector, particularly crude palm oil
and rubber, as well as the fisheries subsector. Considering the competitive structure of the international market
and Indonesia’s vast endowments, the opportunity to expand the agricultural trade surplus through several salient
commodities remains wide open to exploitation. In terms of imports, the high value of agricultural imports reflects
the huge potential for Indonesia’s agricultural sector to supply the domestic demand from industry and for public
consumption. Consequently, despite increasingly limited space for extensification, agricultural productivity may be
increased to raise agricultural production in order to supply external and domestic demand. Nevertheless, efforts
to raise agricultural productivity face a number of challenges, including the condition of infrastructure, business
scale and technology uptake. The Central Government and Regional Administrations have implemented a plethora
of efforts to boost productivity, including the development of agricultural infrastructure and farmer institutions as
well as various other policies to improve national agricultural productivity. To continue improving the effectiveness
of the various policies, the backing of several parties is required towards the long-term target of achieving a current
account surplus.

Agriculture’s Contribution to the

Current Account
The agricultural sector is a large contributor to the
current account in Indonesia. In 2017, the current
account deficit stood at 1.7% of GDP, equivalent to
USD17.53 billion. The non-oil and gas trade surplus,
recorded at USD26.13 billion, helped to maintain
the narrow current account deficit. Agricultural
commodities were the largest contributor to the
surplus, at USD32.61 billion, due to the high value of
*Include other goods, i.e. nonmonetary golds.
exports from upstream agribusinesses5 (Figure II.1). **Include other manufacturings, minings, and CIF to FOB conversion.

Figure II.1. Current Account Structure of Indonesia

5
Based on the classification of the current account structure, upstream agribusinesses are included in the manufacturing industry.
In this section, the discussion on agriculture covers primary agriculture and upstream agribusinesses.

14
NUSANTARA REPORT MAY 2018
The agricultural trade surplus is primarily markets, with strong comparative advantage.
attributable to exports from the plantation Indonesia also enjoys comparative advantage in
subsector, crude palm oil (CPO) in particular (Graph the livestock subsector, with margarine and butter
II.1). CPO exports have accounted for a 61% share of total accounting for 12% of global exports. The comparative
plantation exports over the past five years. In addition to advantage of those products must be maintained,
crude palm oil, rubber is also a key export, accounting for while simultaneously promoting efforts to increase
16% of total plantation exports. Meanwhile, the fisheries value added through downstream activities. Other
and forestry subsectors are also significant contributors commodities, such as fruit, fish products as well as
to the national trade surplus but their contribution has milk and cream, also enjoy great potential to increase
been overshadowed by the plantation subsector. For international market share considering the competitive
Indonesia, the untapped opportunity to increase the nature of the international market and Indonesia’s
agricultural trade surplus through other subsectors abundant endowments. Therefore, the production
remains vast, particularly the livestock subsector as of export commodities should be fully encouraged in
well as food crops and horticulture, which are currently order to optimise the current opportunities.
running a deficit.

The opportunity to increase agricultural exports

in the international market also remains
underexploited. The strength of plantation
commodities from Indonesia is reflected in the
international markets (Figure II.2). The share of CPO
and rubber exports from Indonesia account for more
than 25% of the global total. In addition to plantation
commodities, vegetable oil from Indonesia, primarily
soybean oil as a food crop derivative, accounts for 17%
Source: Customs, processed
of international trade. Those three commodities already
make Indonesia a large exporter in the concentrated Graph II.1. Agricultural Trade Balance

Source: UNCOMTRADE (2012-2016 data), processed

Figure II.2. Global Market Map of Major Agricultural Export Commodities from Indonesia

15
NUSANTARA REPORT MAY 2018
Around 78% of agricultural imports constitute raw
materials for industry (Graph II.2). Wheat is the
dominant agricultural import, which is used as a raw
material in the domestic flour industry. Indonesia’s
climate precludes local wheat production, necessitating
imports from Australia, Canada, the United States and
several other countries. Nevertheless, a number of
other imported produce, including animal feed, sugar,
soybean, fruit, vegetables and beef, could be produced
domestically. The high import value of such products
reflects the large potential for the agricultural sector in
Note: Frontier=100
Indonesia to supply domestic demand. Increasing the Source: Food and Agriculture Organisation (FAO) of the United Nations,
World Bank, processed
production of such commodities demands immediate
attention to strengthen the domestic value chain to Graph II.3. Distance to Frontier of Agricultural Production and
Productivity in Indonesia
meet commercial demand and public consumption.

Challenges to Increasing
Agricultural Productivity
There are several challenges to increasing national
agricultural productivity. The salient challenges
include the condition of physical infrastructure,
business scale and technology uptake. By overcoming
the challenges, on-farm and off-farm productivity may
be improved.

Source: Customs, processed

Graph II.2. Agricultural Imports to Indonesia, 2017

Efforts to increase agricultural production through

improved productivity are desperately required
despite the lack of further extensification potential.
Indonesia’s population of some 260 million requires
Source: Food and Agriculture Organisation (2015), processed
an ever-growing domestic supply of food. Similarly,
the opportunity to meet global demand is also Graph II.4. Agricultural Land Ratio and Irrigation Ratio
vast. Compared with frontier countries, however,
agricultural productivity gains in Indonesia still require The quality and quantity of irrigation networks
special attention (Graph II.3). In terms of rice, as one of must be increased in order to improve on-farm
the biggest rice consumers in the world, the distance productivity. Indonesia ranks in the top 20 countries
to frontier6 of national rice production remains large. worldwide in terms of size of agricultural land area.

6
The distance to frontier is calculated by normalising the min-max production and productivity values of various countries, where
the frontier (maximum value) is equal to 100.

16
NUSANTARA REPORT MAY 2018
Accordingly, agricultural land in Indonesia accounts for by traditional post-harvest management techniques,
31% of total land area but only 11% of the agricultural the suboptimal application of Good Manufacturing
land is irrigated (Graph II.4). In peer countries such Practices (GMP) and limited technology uptake. The
as Thailand and Vietnam, the ratios of irrigated adoption of technology is critical to improving the
agricultural land are 29.0% and 39.3% respectively. quality of post-harvest production. For rice, most
Efforts to expand and improve the national irrigation farmers in Indonesia still rely on natural drying
network by the Central Government over the past three techniques, which reduce the quality of the grain and
years also require local government backing because lower the yield. In addition, the rice milling units (RMU)
irrigation management is currently divided between used in Indonesia also require rejuvenation and other
the central government and local governments at the efforts to increase capacity to ensure more efficient
provincial and regency/city levels. production. Most mills in Indonesia are small with
outdated and inefficient machinery, which adversely
In terms of production inputs, the use of quality
impacts the quality of the processed grain and results
seeds must be improved. Based on data from the
in lower yield (Graph II.6).
Ministry of Agriculture, the use of superior or certified
rice seeds in Indonesia accounted for just 43.52%
of the total in 2016, compared with 80% in Thailand
and 100% in China. The limited use of quality seeds
is confirmed by the low cost allocated to the use of
superior varieties (Graph II.5). The perceived high
cost of superior certified seeds, coupled with a lack
of understanding regarding the importance of using
such seeds, increases the farmers’ propensity to use
independently sourced seeds.

Source: Union of Rice Traders and Millers (Perpadi), 2016, processed

Graph II.6. Business Scale of Rice Milling Units in Indonesia (%)

Interregional connectivity in rural production

Source: International Rice Research Institute (2016)
Graph II.5. Cost of Seeds to Total Production Costs of 1kg of Rice
The quality of post-harvest handling has the
potential for improvement. In the case of rice, yield
in Indonesia is relatively low compared with Thailand
and Vietnam. The same is also true for crude palm oil
(CPO)7. Such inauspicious conditions are explained
centres must be strengthened to improve off-
farm efficiency. Off-farm distribution efficiency is a
perquisite for producer competitiveness. Connectivity
needs to be improved considering that some rural
areas are not accessible to four-wheeled vehicles8
(Graph II.7). In addition to improving rural connectivity,
connectivity between provinces in Indonesia and the
international market also needs to be strengthened
in order to maintain price competitiveness at the
consumer level.
Expanding the business scale and improving
agricultural business management are essential.
In general, landholdings are small and the business

7
According to various sources, rice yield in Indonesia is currently 62.7%, comparatively less than the 69.7% achieved in Thailand
and 66.6% in Vietnam. In terms of plantation crops, the oil extraction rate of crude palm oil in Malaysia reached 20.18% in 2016,
compared with just 15-18% in Indonesia (based on data from the Plantation Research Institute and Malaysian Palm Oil Board).
8
Based on data from BPS-Statistics Indonesia, there are currently 4,763 villages without year-round access, with most located in
Maluku, Papua and Sumatra.
17
NUSANTARA REPORT MAY 2018
scale needs to be increased. According to the Census
of Agriculture in 2013, the number of farm smallholdings
has declined compared with conditions in 2003 but
the proportion remains relatively high at 55% of total
household agricultural businesses.9 In addition, most
farms are managed independently or with help from
family participation, which is not necessarily business
oriented. Based on National Employment Survey data
from August 2017, the status of most workers in the
agricultural sector was dominated by unpaid informal
labour (29.8%) as well as unpaid family labour (26.3%).
Furthermore, the data showed that 95% of on-farm
activities were not supported by written financial
records, pointing to traditional farm management.
Surmounting those challenges will require institutional
support and capable human resources
agricultural sector.
Source: BPS-Statistics Indonesia (2016), processed
Graph II.7. Number of Villages with Year-Round Access to Four-
Wheeled Vehicles
Government Policy to Increase
Agricultural Productivity
The Central Government and
Administrations have implemented various efforts
to increase agricultural productivity, including
strengthening physical agricultural infrastructure and
farmer cooperatives as well as various other policies to
boost agricultural productivity.
9
Smallholders are farmers with less than 0.5 ha of land. Most smallholders are located in the rice producing centres of West Java
and East Java.
10
Source: Ministry of Finance
NUSANTARA REPORT MAY 2018
Development of Agricultural Infrastructure
The Government’s development program for
physical agricultural infrastructure has realised
many impressive achievements. As of yearend 2017,
construction had begun on 36 dams (65 targeted),
846 retention basins (1,893 targeted), 639,9000 ha of
new irrigation networks (1 million targeted) and 1.1
million ha of rehabilitated irrigation networks (3 million
targeted). In 2018, the infrastructure development
agenda to support food security will continue with a
budget allocation totalling Rp37.309 trillion to build
48 dams, 48,000 ha of new irrigation networks, 43
retention basins and 146,000 ha of rehabilitated
irrigation networks. In addition, the Government has
also prioritised the Special Allocation Fund (DAK) to
in the improve irrigation infrastructure. The number of DAK
projects for water sources totalled 2,284, exceeding
all other projects for agriculture. Regionally, Sumatra
received the largest allocation, totalling Rp1,904 million
(Graph II.8). Local Governments are quickly expected
to realise DAK allocation for agriculture to support
regional agricultural productivity.
Local Governments may also utilise the Village Fund
to improve agricultural infrastructure. In 2017, the
Village Fund allocation totalled Rp60 trillion, which
was used to build 109,300km of roads, 852,200km of
bridges, 303,473 connections to a clean water supply,
3,715 wet ponds or retention basins, 16,794 village
markets, 182,919 drainage and irrigation systems,
264,031 water wells and sanitation facilities (MCK),
38,330 basic health facilities and 28,792 early learning
centres10 (refer to Box 1). Moving forward, Local
Governments are expected to further optimise the
Village Fund allocation to develop infrastructure that
supports food security, thus strengthening off-farm
Regional connectivity and the distribution chain. In addition,
on-farm productivity could be enhanced through the
development of irrigation networks, primarily tertiary
irrigation that falls under the auspices of the Local
Governments.
18
Source: Directorate General of Fiscal Balance, Ministry of Finance Source: Agricultural Extension and Development Agency, Ministry of
Agriculture, processed
Graph II.8. Special Allocation Fund (DAK) for Agriculture in 2018
Graph II.9. Poktan and Gapoktan Development

Institutional Strengthening
Institutional strengthening is a government
measure to increase business scale and farm
efficiency in relation to market access and access
to funding. The policy is contained within Act No. 13 of
2013 concerning Farmer Protection and Empowerment,
which regulates the establishment of Famer Groups
(Poktan), Farm Clusters (Gapoktan), Farm Economic
Groups (KEP) and Agricultural Cooperatives (BUMP).
Government efforts have effectively borne fruit.
In 2018, the number of Poktan and Gapoktan had Source: BPS-Statistics Indonesia (2017), processed
increased respectively by 90% and 70% compared with
Graph II.10. Reasons Given for Not Joining a Farmer Group
conditions in 2012. As of May 2018, Poktan totalled
582,700 groups, with Gapoktan reaching 63,400
To build farmer awareness of creating farmer
(Graph II.9). Moving forward, the existing agricultural
groups, the role of extension workers and local
institutions will be urged to develop further and
champions must be expanded. Currently, there
upgrade to the next tier, namely KEP and BUMP, which
is a relatively low number of extension workers in
are legally incorporated and business oriented.
Indonesia compared with the number of potential
Despite rapid development, the effectiveness of agricultural villages, with a ratio of 1 extension work to
policies to strengthen agricultural groups could more than 1 village. Congruently, the budget allocation
be improved. There remain numerous farmers for extension work is also relatively low compared
unaffiliated with a farmer group, primarily due to a lack with the budget for subsidised seeds, fertiliser and
of such groups in the immediate proximity (Graph II.10). farming equipment. Building farmer awareness about
In addition, a number of farmers have also stated that creating farmer groups could be achieved through
their needs are not met through the existing farmer local champions, as members of the local community
groups. who could mentor and empower farmers to become

19
NUSANTARA REPORT MAY 2018
 Source: Juliana (2015) ACET (2017), Uchezuba (2016), Patrick (2004), Sumarno (2013), Bank Indonesia Analysis

Figure II.3. Cooperation Scheme for Farmers and Corporate Partners to Improve Effectiveness

more independent and manage their farms better.
Furthermore, a local champion from the farming
community would also facilitate communication with
the farmers. In addition to creating farmer groups,
extension workers and local champions could also
help increase the capacity and capability of farmers,
most of whom are already middle aged with limited
educational backgrounds.
To be more effective, farmers’ cooperatives should
offer economic incentives to the farmers and
corporate entities (off takers). Farmers have various
needs relating to farm management that could be
accommodated by a farmers’ institution, including price
stability and lower production costs, access to the market
and information, production inputs as well as technical
and managerial expertise. If the farmer group could
provide such needs, famers would be more inclined to
join. Business-oriented famer groups could also open
the opportunity for cooperation with the corporate
sector. Local champions could play an important role
as business aggregators that link farmers to businesses.
One such scheme is known as contract farming, which
offers a number of advantages to increase farm
productivity and farmer prosperity, as detailed in Box 8.
Other Government Policies
The Government is striving to improve the accuracy
and synchronisation of agricultural data in order
to support effective agricultural policymaking and
implementation. Based on the verification checks
conducted by the National Geospatial Agency for 15
provinces in Indonesia, there was a 15% difference
between actual agricultural land area and the data
published in 2013. Such verification checks are
critical because the area of agricultural land is used
to determine the production of various different
commodities. Data synchronisation at the various
government ministries and institutions is also required
for agricultural policymaking because such policies fall
under the auspices of several ministries and institutions.
The implementation of One Map Policy should be
accelerated to improve data accuracy. The One Map
Policy is mandated by Act No. 4 of 2011 concerning
Geospatial Information. In 2016, the Government

20
NUSANTARA REPORT MAY 2018
Source: Dr Patrick, Ian. (2004). “Contract Farming in Indonesia: Smallholders and Agribusiness Working Together”; Sumarno, et. al. (2013) “Farmers’
Motivation in Partnership Farming Systems of the Broiler Industry in GERBANGKERTASUSILA, East Java, Indonesia”; FGD with academics, industry players,
and farmers; REKDA May 2018 DR I, II, III.

Figure II.4. Lessons Learned from the Success Stories of Farmer Economic Groups

launched the 7th Economic Policy Package, which set Table II.1. Agricultural Subsidy Schemes
One Map Policy as a priority program. In the same year,
Presidential Decree No. 9 of 2016 was issued regarding
the Accelerated Implementation of One Map Policy at
a Map Scale of 1:50,000. Considering the importance
of One Map Policy for agricultural policymaking and
implementation, the backing of various parties to
complete the map quickly is critical.

Strengthening the quality of agricultural data would

also improve existing input subsidy policy. The
Government allocates a large budget towards providing
input subsidies, hence the policy is expected to have a
significant impact in terms of boosting productivity. The
input subsidies provided by the Government currently
include seeds, fertiliser and farming equipment, which
are provided directly to farmer groups. The option of
a policy mix between input and output subsidies to
increase agricultural productivity needs to be explored. various schemes practiced around the world could be
Output subsidy schemes to elevate productivity are combined with the existing input subsidies provided
offered in various other countries, including China, by the Government to further induce agricultural
India, Australia and the United States (Table II.1). The productivity.

21
NUSANTARA REPORT MAY 2018
To stimulate agricultural exports, ongoing CEPA that is currently in the negotiation phase. Such trade
government efforts to expand and diversify the agreements represent a tangible government endeavour
export market through trade agreements should to increase agricultural exports from Indonesia. The
be redoubled. The government is currently promoting backing of sectoral research as well as marketing and
bilateral and multilateral trade agreements with the major communication strategies is required in order to optimise
global markets, such as the Indonesia-European Union the benefits of negotiating such trade agreements.

22
NUSANTARA REPORT MAY 2018
 BOX 1

REGIONAL UTILISATION AND REALISATION

OF THE VILLAGE FUND
The village fund disbursement program has now entered its fourth year11. Initially, only 82% of the
Village Fund was absorbed. Subsequently, in 2016 and 2017, absorption increased significantly to 97.65%
and 99.61% respectively12. According to the State Budget for 2018, the Government has again allocated
Rp60 trillion to the Village Fund, equivalent to Rp800 million per village with an indicative target this
year of 74,957 villages. The Village Fund prioritises village development and local empowerment in line
with the current development stage of each respective village. Based on a survey conducted by Bank
Indonesia, the Village Fund is typically utilised to provide basic public infrastructure and facilities.
Moving forward, Village Fund utilisation will be optimised to provide or repair infrastructure that
supports agricultural productivity in rural areas.

The Village Fund represents one component of a Bank Indonesia survey conducted in Sumatra, Java and
village’s income that supports local development Eastern Indonesia.
and empowerment in rural areas. The Government
The Bank Indonesia survey performed in Sumatra
has incrementally increased Village Fund allocation
showed that Village Fund utilisation focused on
each year since 2015. On average, the budget for each
developing residential areas and village capacity
beneficiary village was around Rp280 million in 2015,
building. In addition, the Village Fund was also used
thereafter soaring by 124.29% to Rp628 million in 2016
to build agricultural infrastructure, such as irrigation,
and a further 27.38% to Rp800 million in 2017. A survey
and to provide extension work to support agricultural
conducted by Bank Indonesia revealed that the Village
development. The survey in Sumatra encompassed a
Fund is utilised in accordance with the principles of the
sample of 319 beneficiary villages.
Fund, namely to prioritise basic public infrastructure
and facilities, such as building village roads and bridges
as well as connecting water supply13. For the current
year, Village Fund realisation in the first quarter of
2018 has performed well.

Village Fund Utilisation in 2017

Village Fund utilisation in most regions in 2017
targeted economic activities and improving the
quality of rural life. Nationally, the Village Fund in
2017 was used to build 109,300km of roads, 852.2km
of bridges, 303,473 connections to a clean water
supply, 3,715 wet ponds or retention basins, 16,794
village markets, 182,919 drainage and irrigation
systems, 264,031 water wells and sanitation facilities Source: Portrait of Village Fund Utilisation and the Challenges Faced in
(MCK), 38,330 basic health facilities and 28,792 early 2017, Bank Indonesia

learning centres14. The accomplishments of Village Graph III.1 Impact of the Village Fund on Working Hours, Income and
Fund utilisation in 2017 were also corroborated by a Unemployment15

11
Mandated by Act No. 6 of 2014 concerning the Village Fund.
12
National realisation of the Village Fund in 2017 was recorded at Rp59.77 trillion of a total Rp60.00 trillion (Source: Ministry of Finance).
13
Bank Indonesia surveyed 1,163 villages located in Sumatra, Java and Eastern Indonesia.
14
Source: Ministry of Finance..
Based on the Portrait of Village Fund Utilisation and the Challenges Faced in 2017 conducted by all Bank Indonesia Representative
15

Offices in 1163 villages

23
NUSANTARA REPORT MAY 2018
On the other hand, the survey conducted in Java
showed that Village Fund utilisation tended to
focus on the self-managed and labour-intensive
development of infrastructure. The survey used
a sample of 400 beneficiary villages and revealed
that the priority was building roads and developing
residential areas, with only a small allocation extended
to the agricultural sector. The analysis also showed
that the Village Fund had effectively increased working
hours and incomes in the affected villages, while
simultaneously reducing unemployment, especially in
rural areas.
Difference-in-differences analysis demonstrated that
the Village Fund had increased the average number of
working hours in the beneficiary villages by 0.76-1.09
hours per week (Graph III.1). Furthermore, the impact on
incomes was even more pronounced, with real incomes
increasing in the 12-28% range. Finally, the Village Fund
had also effectively reduced unemployment by 0.9-1.8%
over a 2-year period.
In Eastern Indonesia, most the surveyed villages used
the Village Fund to build physical infrastructure and
facilities, primarily in the form of roads, drainage
and clean water supply. In addition, the Village Fund
was also utilised to improve basic social services in terms
of health and education, with the agricultural sector
not yet considered a priority. Striving towards local
empowerment, most of the Village Fund was disbursed
for capacity building and to provide capital backing for
village-owned enterprises (BUMD).
Village Fund Realisation in Q1/2018
In 2018, the government reformulated the Village
Fund allocation mechanism16 in order to hone priority
utilisation of the funds. Consequently, Village Fund
allocation for Sumatra in 2018 increased 7.94% (yoy) on
the previous year to Rp17.2 trillion, accounting for 28.78%
of the national total. Meanwhile, Java received a Rp19.2
trillion allocation, up 2.79% (yoy) on the previous year
and accounting for 31.9% of the national total. Finally,
Eastern Indonesia received Rp23.56 trillion, increasing
3.73% (yoy) on the previous year and accounting for a
dominant 39.3% of the national total.
As of the first quarter of 2018, Village Fund absorption
had reached 17.1%, led by Java with 17.4%, followed
by Eastern Indonesia with 17.3% and Sumatra with
16.5%. Village Fund realisation in Sumatra reached
16.5% in the first quarter of 2018, equivalent to Rp2.85
trillion, with the following provinces topping the regional
achievement: Bangka Belitung (27%), Jambi (22,2%),
West Sumatera (20%), Bengkulu (20%), Riau Islands

Aceh
99,88

North Sumatera KalTara

98,63 99,86
North Sulawesi
Riau 99,82
99,92 Riau Islands East Kalimantan
100 West Kalimantan Gorontalo
99,45 99,65 North
West Sumatera 99,95
96,10 Maluku
Jambi Babel Islands Central Sulawesi 99,93 West Papua
99,92 100 Central Kalimantan 99,73 99,93
99,62 West Sulawesi
South Sumatera 99,94
Bengkulu 99,73 South Kalimantan Papua
99,95 South East
99,83 Sulawesi 98,31
Lampung Maluku
99,99 99,54 98,42
South Sulawesi
99,90
Central Java
100
Banten West Java Bali
99,91 99,98
East Java 100
99,92
DI Yogyakarta East Nusa Tenggara
100 99,81
West Nusa Tenggara
99,96

VF = 100% 99% ≤ VF < 100% 98% ≤ VF < 99% VF < 98%

Figure III.1. Village Fund Realisation in 2017

16
In 2018, the government refined the Village Fund allocation mechanism by adjusting the proportion distributed evenly (basic
allocation), the proportion distributed based on a formula (formula allocation) and the proportion distributed to disadvantaged
villages and critically disadvantaged villages (affirmed allocation).

24
NUSANTARA REPORT MAY 2018
(20%), South Sumatera (18,3%) and Lampung (18,7%).
In Java, Village Fund realisation reached 17.45% in the
first quarter of 2018, equivalent to Rp3.2 trillion, with
two provinces surpassing the regional average, namely
Central Java (18%) and Yogyakarta (26%). In Eastern
Indonesia, however, Village Fund realisation reached
17.3% in the first quarter of 2018, equivalent to Rp4
trillion, with Bali (43.7%), South Kalimantan (26.7%) and
Gorontalo (25.9%) leading the absorption of funds in the
region and nationally.
A lack of understanding regarding the Village Fund
utilisation guidelines has been cited as the most
binding constraint to Village Fund absorption.
Although the survey acknowledged that most beneficiary
villages had received socialisation activities, there
were still often difficulties faced when disbursing the
budget and preparing the supporting documentation.
Therefore, further mentoring is required in the Village
Fund realisation process to ensure more optimal
absorption.

Aceh
13,70

North West Sumatera North Kalimantan

14,65 20,00
North Sulawesi
20,00
Riau Gorontalo
12,87 Riau Islands East Kalimantan 25,89
20,00 West Kalimantan 14,85
West Sumatera 13,42 North Maluku
20,00 20,00
Jambi Babel Islands Central Sulawesi West Papua
22,25 27,03 KalTeng 20,00 10,46
3,00 West Sulawesi
South Sumatera 20,00
Bengkulu 18,32 South Kalimantan Papua
20,00 26,68 South East Sulawesi 11,97
Lampung 19,98 Maluku
18,77 South Sulawesi 20,00
18,00
Central Java
West Java 18,25
Banten Bali
14,84 16,96 43,69
East Java
DIY Yogyakarta 16,48
26,63 East Nusa
West Nusa Tenggara
Tenggara 19,41
20,00

VF ≥ 25% 20% ≤ VF < 25% 15% ≤ VF < 20% VF < 15%

Figure III.2. Village Fund Realisation in Q1/2018

25
NUSANTARA REPORT MAY 2018
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26
NUSANTARA REPORT MAY 2018
 BOX 2

STRENGTHENING GOODS TRADE BALANCE

THROUGH PRODUCTION AND MARKETING OF
COFFEE INDUSTRY IMPROVEMENT
Role of the Coffee Industry in Aceh (10.73%). In 2017, a total of 795,431 hectares of
land in Sumatra were allocated to coffee production,
Sumatra
accounting for 64.23% of the national total and
In terms of the international coffee trade, Indonesia dominated by Robusta coffee (72.13%). The main
is the fourth largest exporter by volume after production centres of Robusta coffee on Sumatra are
Brazil, Colombia and Germany. Regrading trade located in South Sumatra, Lampung and Bengkulu,
value, coffee exports from Indonesia are ranked sixth while Arabica coffee is predominantly produced in Aceh
after Brazil, Colombia, Germany, Switzerland and Italy. and North Sumatra (Figure II.2). The majority of coffee
The comparatively lower export value of coffee from plantations located in Sumatra are smallholdings (Table
Indonesia is because 98% of coffee exports are in the III.1), therefore any further development will have an
form of non-roasted or green beans, which have lower inclusive impact on the local and national economies.
value added than roasted coffee. Global demand for
green beans (non-roasted coffee) remains high as a raw
material for industry. Brazil and Colombia also export
green beans but both countries have the capacity to
produce vast amounts of coffee, thus generating very
high export value. The main production hubs of coffee
in Indonesia are Sumatra, Java, East Nusa Tenggara and
some areas of Sulawesi (Figure III.3).

Source: Data and Information Centre and Ministry of Agriculture

Figure III.4. Distribution of Coffee Production in Sumatra

Table III.1. Coffee Plantation Landholdings in 2017 (ha)

Source: Ministry of Agriculture, processed

Figure III.3. Distribution of Coffee Production in Indonesia

Source: Data and Information Centre and Ministry of Agriculture

Sumatra is a key contributor to coffee production in Sumatra is also the dominant contributor to coffee
Indonesia. Coffee production on Sumatra accounts exports from Indonesia. The region accounts for
for 72.13% of the national total, originating from 63.3% of the national total. Currently, green beans
South Sumatra (17.63%)17, Lampung (17.50%) and continue to dominate coffee exports from Sumatra, in

17
Percentage of the national total.

27
NUSANTARA REPORT MAY 2018
contrast to minimal exports of roasted coffee (including
extracts, essences and concentrates) due to limited
market access. Data from 2017 confirmed that Sumatra
was a net importer of roasted coffee. Nonetheless,
several companies in Sumatra have begun downstream
coffee processing and successfully produced extracts,
essences and concentrates using 100% local raw
materials. Furthermore, the coffee extracts, essences
and concentrates have been exported to several trading
partners, including Malaysia (63.25% of the total),
Singapore (26.20%) and Hong Kong (4.02%).
Source: GAEKI, USDA, TNS Analysis
Coffee Industry Potential and Graph III.2. Projected Domestic Coffee Production and Consumption
Challenges
There remains a vast opportunity for future coffee
industry growth and development, backed by
strong global demand. National and global coffee
consumption is expected to track an upward trend as
the coffee lifestyle continues to proliferate in line with
rising incomes. Nevertheless, international coffee supply
is expected to encounter several constraints in the next
few years in terms of meeting growing global demand
(Graph III.2), which is creating an opportunity for coffee
producers to continue ramping up production.

The characteristics of Sumatran coffee are unique Source: Data and Information Centre and Ministry of Agriculture
and not replicated elsewhere. Those characteristics
Graph III.3. Coffee Productivity in Sumatra vs Indonesia (kg/ha)
represent tangible value added for further coffee
development in Sumatra. Several areas of Sumatra
already produce speciality coffee18, such as Gayo in
721kg/ha (Graph III.3). Nevertheless, productivity in
Aceh, Mandailing and Sidikalang in North Sumatra
Indonesia is well below the levels achieved in other net
and Semendo in South Sumatra. Speciality coffee is
exporters, such as Brazil, Vietnam and Colombia, where
becoming increasingly popular amongst coffee drinkers,
productivity exceeds 900kg/ha.
thus edging up the price compared with other coffee.
Several on-farm and off-farm constraints have
Notwithstanding, coffee plantations in Sumatra
led to suboptimal coffee productivity and limited
are also facing several challenges that preclude
production of international-standard coffee. The
the region from taking full advantage of the
on-farm constraints include input quality and limited
opportunities afforded by the international coffee HR capacity. The use of prime coffee beans that are
market. One of the most binding constraints is the appropriate for the contour, climate and soil nutrients
level of productivity. Productivity currently stands remains limited and unevenly distributed. Traditional
at 759kg/ha, which exceeds the national average of farming techniques that lack adequate fertilizers and

18
Specialty coffee has a premium aroma and taste, with the quality based on a cupping test score and the green beans.

28
NUSANTARA REPORT MAY 2018
soil management have impeded coffee development
in Sumatra. In addition, there is a dire lack of Good
Agricultural Practices (CAP) known or used amongst
the local coffee farmers. Furthermore, low productivity
in Sumatra is also attributable to the age of the coffee
plants, with most exceeding 20 years and lacking any
replanting program. On the other hand, the off-farm
constraints include the poor quality and absence of
supporting infrastructure, such as irrigation, warehouses
and roads. Additionally, there is minimal access to
technology application and agricultural mechanisation,
thus undermining farm efficiency and product quality
that falls below international standards.
Coffee industry development in Sumatra also
faces challenges in terms of the types of coffee
cultivated and further downstream processing.
Sumatra is currently experiencing a supply-demand
mismatch for the export market. Coffee production in
Sumatra is dominated by Robusta beans (73%), while
most global demand is for Arabica coffee. Furthermore,
Indonesia has been unable to produce value-added
coffee products, with downstream coffee processing of
extracts, essences and concentrates only accounting for
around 4.1% of total coffee exports from Sumatra.
Coffee Development Strategy in
Sumatra
Coffee production integrated with market access
that could optimise existing potential is required.
Downstream, continuous mentoring and extension
work must be improved and expanded, particularly in
terms of coffee cultivation techniques, the application
of Good Agricultural Practices (GAP) as well as pest and
disease management. Congruent with the nascent trend
for organic coffee, local farmers need to be introduced
to organic coffee production in order to produce high-
quality beans at a high level of productivity. Post-
harvest handling must also be improved to ensure the
green beans qualify for the export market. In terms
of marketing, internationally certificated facilities are
required to improve the competitiveness of Sumatran
coffee, including Rainforest Alliance, Organic and Fair
Trade certified19.
Short and long-term efforts are required to
accelerate coffee development in Sumatra. In the
near term, coffee productivity could be improved
through training, technical mentoring and efforts to
expand market access, while increasing production
through strategic partnerships such as cooperatives.
In terms of marketing, cooperation with local coffee
shops and minimarkets as well as luxury hotels in
Sumatra would immediately broaden market access.
In the medium-long term, farmer groups will need
to be established with the involvement of local
government, the banking industry, exporters, farmers
and researchers. Furthermore, a financing scheme
must be developed to fund replanting and rejuvenation
programs for old coffee plants and to expand the land
allocated to Arabica coffee.

19
Rainforest Alliance certification is awarded for farming techniques that meet comprehensive environmental, social and economic
criteria built on the principles of sustainable farming (effective planning and farm management systems, biodiversity conservation,
natural resource conservation, improved livelihoods and human wellbeing as well as sustainable livestock production). Meanwhile,
Organic certification is awarded to producers of organic foods and other agricultural produce based on production standards
in planting, storage, production, processing, packaging and distribution (shipping). Fair Trade certification ensures that coffee
farmers receive a guaranteed price and avoid price exploitation, thus earning a decent livelihood from the production process in
accordance with fair trade standards.

29
NUSANTARA REPORT MAY 2018
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30
 BOX 3

DEVELOPMENT OF SUGAR INDUSTRY THROUGH

INCREASED SUGARCANE PRODUCTIVITY
AND YIELD
Sugar Production, Consumption
and Deficit Requirement in Sumatra
Sumatra plays a decisive role in the national sugar
industry. Based on 2017 data, sugarcane production
in Sumatra totalled 898,000 tons, equivalent to around
36% of national sugarcane production. Within Sumatra,
Lampung province is the main contributor to sugar
production, producing 768,000 tons in 2017 and making
the region the second largest sugarcane producer in
Indonesia (Table III.2).
Nevertheless, domestic sugar production
hitherto failed to satisfy the domestic requirement
for consumption. Based on 2017 data, domestic sugar
Table III.2. Sugar Crystal Production in Sumatra
Source: Sugarcane Plantation Statistics – Indonesia, Directorate General of
Plantations
production was recorded at 2.5 million tons, compared
with household20 and commercial21 consumption of 2.8
million tons and 3.4 million tons respectively (Graph
III.4). Consequently, domestic demand for sugar is met
through imports of raw sugar, refined sugar and white
sugar crystals. Despite the surplus recorded in terms of
white sugar crystals, amounting to 473,000 tons (2017),
Sumatra experiences a refined sugar crystal deficit.
Consequently, demand for refined sugar crystals must
be met through imports from two of the largest global
sugar suppliers, namely Thailand and Brazil, accounting
has for 87.9% of total sugar imports to Sumatra.
Sugarcane Plantation Challenges in
Sumatra
Sugar crystal productivity in Sumatra exceeds the
national average (Graph III.5). The comparatively high
level of productivity is due to the prevalence of private
sugarcane plantations, accounting for 76.4% of total
production. Meanwhile, the production of sugar crystals
from state-owned plantations and smallholdings
account for just 13.9% and 9.7% respectively.

Source: Data and Information Centre, Ministry of Agriculture 2017; Source: Sugarcane Plantation Statistics Indonesia 2016-2018
Indonesian Food and Beverages Association (GAPMMI) & Ministry of
Industry, processed Graph III.5. Sugar Crystal Productivity in Sumatra vs Indonesia

Graph III.4. National Sugar Surplus/Deficit

20
White Sugar Crystals (WSC).
21
Refined Sugar Crystals (RSC).

31
NUSANTARA REPORT MAY 2018
More effective and efficient production techniques
on private sugarcane plantations have successfully
increased productivity. Sugarcane productivity on
private plantations currently stands at ± 86 tons/
ha, compared with ±70 tons/ha on smallholdings.
Better production techniques on private plantations
are one determinant of higher granulated sugar22
productivity in Sumatra (4.89 tons/ha) compared with
the national average (3.74 tons/ha). Nationally, most
sugarcane plantations are smallholdings. Despite
lower productivity, sugarcane smallholdings are critical
suppliers of raw materials for the sugar industry. With
relatively diminutive smallholdings, averaging ±1 ha,
land intensification through optimal cultivation patterns
and the application of fertiliser must be promoted in
order to increase arable land productivity.
Despite surpassing the national average, sugar
crystal productivity and yield remain below what
have been achieved in other countries. Sugar crystal
productivity in Sumatra is below that found in Brazil,
Thailand and Vietnam at 9.68 tons/ha, 6.9 tons/ha and
6 tons/ha respectively. In addition, sugarcane yield23 in
Sumatra, at 7%, also falls short of that reported in Brazil,
Thailand and Vietnam at 13.31%, 10.8% and 10.5-11.5%
respectively.
Comparatively low sugarcane productivity
Sumatra is the result of several on-farm constraints.
The on-farm constraints include the use of suboptimal
seeds that are not disease resistant, limited access to
irrigation facilities because most sugarcane is planted on
non-irrigated24, arable land and the prevailing harvesting
method that uses ratooning25 8-12 times rather than the
preferred techniques that can be done a maximum of
3-4 times. As the name suggests, the small-scale nature
of smallholdings, combined with scattered plots not
located on contiguous land undermines productivity.
Sugarcane productivity is also undermined by the
transportation methods, which soil the milled sugarcane
and result in impurities exceeding 10%. This also reduces
the level of sucrose in the sugarcane by as much as
22
Crystallized sugar.
23
Sugar content in the sugarcane.
24
Potential production of sugarcane planted in wetland paddy fields could reach 100 tons/ha, compared with around 90 tons/ha
on non-irrigated arable land.
25
Ratoon is the new shoot or sprout springing from the base of a sugarcane plant after it has been cropped. The resultant shoot
is cultivated without the need for replanting.
NUSANTARA REPORT MAY 2018
20%. Furthermore, access to production inputs, such as
fertiliser, remains severely restricted, especially in terms
of subsidised fertiliser.
In addition to the on-farm constraints, there
are a number of off-farm challenges that are
detrimental to efficient sugarcane management.
Low management capacity at sugarcane mills, coupled
with aging machinery, impedes post-harvest handling.
The loss in sugarcane processing averages around
25%. Inefficient processing is also caused by sporadic
production due to a lack of raw sugarcane. Furthermore,
fresh sugarcane processing is best achieved within 36
hours of the harvest. Finally, downstream sugarcane-
based products remain limited and the payment process
to sugar farmers is regularly delayed, which are strong
disincentives for the further development of sugarcane
production.
Strategy to Increase Sugarcane
Productivity and Yield
Sugarcane plantation and sugar industry
development require the support of increasing
productivity and yield along with greater efficiency
at sugarcane mills. Efforts to improve productivity,
particularly amongst smallholding famers, require the
in backing of strong synergy with the government and
processing industry. Schemes to strengthen farmers’
cooperatives through core plasma partnerships with
the business community could be extended, similar to
what has been undertaken in Lampung. Partnerships
with innovative planting patterns at production hubs in
Lampung have effectively increased productivity from
70 tons/ha to 98 tons/ha. The increase has also been
supported by greater access to quality production inputs.
Furthermore, companies in Lampung provide initial
funding for the farmers to purchase fertiliser, pesticides
and farming equipment through reimbursements.
Increasing productivity and yield quality could be
achieved through short-term as well as medium-
long term improvements. In the near term, sugarcane
32
production could be improved through: (i) the use
of superior sugarcane varieties; and (ii) the use of
sugarcane residue/by-products as an organic fertiliser.
The use of sugarcane residue as an organic fertiliser
is the success story of one sugar producer in Sumatra,
working in conjunction with the farmers to improve
sugarcane productivity. In the long term, infrastructure
support is required in the form of irrigation, water pumps
and retention basins (wet ponds) for non-irrigated land
along with adequate access to quality roads, which
would support stable intertemporal production between
seasons and ensure uninterrupted transportation of
33
NUSANTARA REPORT MAY 2018
sugarcane to the processing mills, thus minimising the
losses. Intensive technical mentoring and extension
work are also required for smallholders along with
greater financial access. Furthermore, the revitalisation
of existing sugarcane milling machinery should be
considered as a potential strategy to overcome the
low efficiency blighting sugarcane mills. In addition,
development of the downstream sugar industry is
required, including the ethanol industry for example,
which would provide new incentives for companies and
farmers to increase future production.
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34
NUSANTARA REPORT MAY 2018
 BOX 4
RICE FARMING PERFORMANCE
IMPROVEMENT STRATEGY
Java as the National Rice Producer
As the national rice producer of Indonesia, Java
produced 40.9 million tons of dry milling grain
(DMG) in 2017, accounting for 50.2% of total national
production. The area allocated to rice on the island of
Java totalled 6.9 million hectares, around 44.5% of the
national harvest. Regionally, the main production hubs
on Java are located in East Java, West Java and Central
Java (Graph III.6).
Source: Ministry of Agriculture of the Republic of Indonesia, processed
Graph III.6. Rice Production in Java
On the other hand, Java is also the largest rice
consumer in the Indonesian archipelago. In 2017,
Java consumed around 11.89 million tons of rice,
equivalent to 53.55% of total national consumption.
On the island of Java, the province of West Java is
the largest consumer, amounting to 4.09 tons in
2017. Although rice production in Java exceeds its
consumption, rice is still imported because Java
supplies rice to other regions through inter-regional
trade. Rice imports originate primarily from Thailand.
35
NUSANTARA REPORT MAY 2018
Congruent with the high level of consumption,
rice plays a significant role in the formation of
inflation on the island of Java. The weight of rice
in the calculation of inflation on Java is relatively high
at 3.52% of total inflation and 9.71% of volatile food
inflation, thus rice prices have a significant effect on
Java’s inflation. Controlled inflationary pressures on
rice prices in 2016-2017 have helped to maintain
total inflation in the region of Java below 3%.
Rice Farming Challenges
If rice consumption continues to rise, it could
potentially outstrip rice production. Year on year,
rice consumption has increased and is projected to
grow a further 2.36% in 2019. In contrast, production
is tracking a downward trend. From 2012-2017,
the rice trade balance recorded a deficit in Java.
The surpluses achieved in East Java, West Java and
Central Java are consumed in Jakarta, Banten and
Yogyakarta. Meanwhile, only Banten receives a rice
supply from outside of Java to meet demand. In
addition, the rice surplus on Java is also distributed
to Eastern Indonesia.
The rice production surplus in Java is relatively
limited. Over the past few years, rice production in
Java has recorded a small surplus that is, however,
vulnerable to pre-harvest shortages. Consonant with
seasonal trends, rice production is typically most
abundant at the peak of the harvesting seasons, with
the first harvest in March and the second in August.
During such periods, inflationary pressures on rice
are mild due to abundant stock (Graph III.7).

Source: Customs, processed
Graph III.7. Rice Imports and Exports in Java
Downstream industries do not optimally support
rice farming in Java. As the rice producer of Indonesia,
Java’s rice production is concentrated in West Java and
East Java but these areas do not have access to large
milling operations in close proximity because the mills
are generally located in Central Java.
Lessons Learned from Rice Farming in
Thailand26
Thailand is a net exporter of rice with a few
advantages. As a leading global rice exporter,
Thailand supplies rice to numerous countries, including
Indonesia. Rice farming in Thailand is supported by
several factors that generate competitive advantages
as follows:
First, rice land management in Thailand uses the latest
technologies and machinery, with 1-5 harvests possible
each year, far superior to the 1-2 harvests in Indonesia
each year. High-frequency harvesting and abundant
production make Thailand the second largest global
rice exporter according to WTO data.
Second, labour costs and land leases are lower in
Thailand compared to other ASEAN countries. Low
labour costs are attributed to high productivity per
worker because of technology uptake. During the
planting season, the number of working days per farmer
amounts to only one-ninth of the corresponding working
days in Indonesia. Such cost efficiency generates a 1.4-
fold higher margin compared with farmers in Indonesia.
26
Source: IRRI 2015, Patum Rice Mill and Granary 2017, MOAC Thailand.
36
NUSANTARA REPORT MAY 2018
Third, the Government of Thailand runs the on-farm
Paddy Pledging Program and Interest Rate Subsidy
Program. These programs allocate funds to farmers
willing to sell rice outside of the harvest season and
provide subsidised interest rates on loans to traders
willing to store rice during periods of abundance.
Consequently, the programs maintain a stable supply
of rice year round.
Fourth, the government offers assistance regarding
GAP (good agricultural practices) and GMP (good
manufacturing practices) certification for farmers
seeking to export rice. The certification maintains rice
quality to meet export standards considering that the
quantity of rice produced in Thailand already exceeds
domestic consumption.
Fifth, farmers apply a system of contract farming that,
amongst others, reduces the risks borne by the farmers.
Under contract farming, in addition to corporations
and farmers, the government also bears the risk of a
failed harvest. Furthermore, clauses in the contracts
stipulate that corporations are required to guarantee a
minimum purchase price for the rice bought from the
farmers if the product meets the standards set by the
government. Nevertheless, if the market price exceeds
the contract price, the farmers are free to sell the rice
to a third party at the higher price.
Sixth, implementation of a robust regional zoning
system. According to the land zoning concept prevalent
in Thailand, the government ensures that areas
allocated to rice production have a research centre
present, which enables a quick response by experts in
the event of a pest attack or other technical constraint.
Strategy and Policy to Increase Rice Farming
Performance
The Government of Indonesia has instituted several
policies to improve domestic rice farming. On the
production side, the government has rolled out an
insurance program that covers rice farmers, while also
subsidising production inputs in the form of fertiliser
and seeds, as well as agricultural production equipment.
In terms of prices, the government has set a minimum
government purchase price applicable to unhulled rice
purchased by the Indonesian Bureau of Logistics (Bulog).
In addition, the government is currently remapping the
land allocated to rice farming in order to update and hone
the national food production data, which will support
more accurate policymaking (refer to Chapter 5: Strategic
Issues). Finally, there are a number of opportunities to
strengthen national rice farming as follows:
First, the application of modern farming by adopting the
latest land management technology, including the use of
superior seeds. Working agricultural land with advanced
modern machinery would improve cost efficiency and
simultaneously increase productivity. Such a strategy
has been developed in Central Java through cooperation
between farmer groups and modern processing units,
which could be replicated elsewhere. Modern farming
represents an embryo with potential for further
development to become a model of more efficient
corporate farming with economies of scale.
Second, integrated rice stock management with the
Indonesian Bureau of Logistics (Bulog) and backed
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NUSANTARA REPORT MAY 2018
by Municipal Enterprises (BUMD) in each region. The
Local Government of Jakarta has BUMD that function
to guarantee adequate food supply considering that
Jakarta is reliant upon external supply. The BUMD in
Jakarta have already developed a cooperative scheme
with production centres that guarantee prices, quantity,
sustainability and timely payments. The scheme
represents an opportunity for rice producing areas to
develop more efficient farming systems. Furthermore,
the scheme also benefits rice stock management
throughout the year as well as judicious policymaking
in relation to rice farming that does not burden the
farmers.
Third, using technology to manage information
concerning the latest rice prices and supply conditions.
The Center of Strategic Food Price Information (PIHPS)
provides price data in a number of areas. Moving
forward, the data should be expanded to include
production and stock data, which could be developed
further as an early warning system for policymakers
when taking appropriate control measures.
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 BOX 5
RED CHILLI FARMING PERFORMANCE
IMPROVEMENT STRATEGY
Java as the National Production
Hub for Red Chilli
Java is the national heartland of red chilli
production. In 2016, Java produced 530,2 thousand
tons of red chilli, accounting for 47% of total national
production (Graph III.8). A total of 57,8 thousand
hectares of land is allocated to red chilli production,
equivalent to around 47% of the national harvest.
Regionally, red chilli production in Java is dominated
by West Java and East Java.
Source: Ministry of Agriculture, 2017, processed
Graph III.8. Red Chill Balance Sheet – Java
The red chilli produced in Java is also distributed
to Sumatra and Eastern Indonesia. A portion of the
red chilli produced in Java is also exported to other
regions, including Sumatra and Eastern Indonesia.
Meanwhile, most demand for red chilli on Java is
met by local production but to bridge the gap and
to meet national demand, Java also imports red chilli
from India and China.
In addition to Java’s status as a production centre,
the island is also the largest consumer of red
chilli. In 2016, for example, red chilli consumption in
Java totalled 552 thousandtons, equivalent to 56.82%
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NUSANTARA REPORT MAY 2018
of total national consumption. Red chilli consumption
is dominated by households, hotels and restaurants
(62%) as well as the processing industry (38%). Despite
Java’s status as the national red chilli hub, production
has declined while consumption continues to expand.
Consequently, local production no longer satisfies
local consumption, with a deficit recorded since 2016.
Production has declined on Java as land has been
converted to other functions.
Red Chilli Farming Challenges:
Red chilli plays a significant role in determining
inflation on Java. Red chilli prices are the most volatile
of all commodities included in the volatile foods (VF)
basket. In fact, inflationary pressures on red chilli even
reached 138% (yoy) at the end of 2016 as inclement
weather disrupted supply chains across regions.
Notwithstanding, inflation of red chilli on Java has
tracked a downward trend during the last few quarters
(Graph III.9).
Source: BPS-Statistics Indonesia, processed
Graph III.9. Red Chilli Inflation and Contribution in Java
Red chilli prices are volatile, which is exacerbated
by the planting season and weather conditions. Red
chilli production is contingent on the planting season
and prevailing weather conditions. In general, the
highest production level is achieved in May and the
lowest in January. Production subsequently influences
stock levels and selling prices. Furthermore, red chilli
is a perishable, therefore restricting the viable storage
period, which translates into price fluctuations
depending on stock levels. Consequently,
chilli inflation is typically inversely proportional to
production and stock levels.
Lessons Learned from Red Chilli
Farming in India
India is a global exporter of red chilli. Red chilli
production in India benefits from several advantages
as follows:
First, land management in India applies the latest
technologies using modern machinery and developing
superior seeds. In Indonesia, traditional
management techniques are prevalent, therefore the
costs are 2.4 times higher in Indonesia compared with
India.
Second, India has educated its farmers regarding
the advantages of contract farming, thus giving
the farmers a stronger negotiating position when
discussing cooperation with the corporate sector.
Through contract farming, Indian farmers have access
to alternative funds outside of the banking system,
while also receiving market and price assurance.
The various benefits translate into adequate capital
for the farmers to optimise land use and increase
productivity. In contrast, farmers’ understanding
of contract farming in Indonesia remains severely
limited, thus restricting access to capital to increase
economics of scale, which leads to suboptimal land
use and low productivity.
Third, India’s Government provides assistance in
the form of installing cold storage system, which
is invaluable for a perishable such as red chilli. The
development of cold storage in India has made red
chilli a more durable product, which has created an
export opportunity for Indian farmers.
Fourth, the Government has also implemented
a Minimum Support Price (MSP) to provide price
NUSANTARA REPORT MAY 2018
assurance at the farm level. Consequently, the assured
minimum price helps Indian farmers to maintain a
certain level of prosperity.
Fifth, India has established the Central Institute of
Horticulture, which can certify horticultural farmers
red
in India. Certification ensures that Indian farmers
can manage red chilli farming in accordance with
prevailing standards.
Policy Strategy to Expand Red
Chilli Production and Distribution
The Government of Indonesia has a number of
policy strategies to raise the performance of red
chilli farming. The policies include: (i) assessing and
registering different horticultural varieties to ensure
that the seeds entering Indonesia can be developed
land in the domestic market; (ii) Producing, certifying and
supervising the circulation of horticultural seeds to
ensure they are in accordance with international
standards; and (iii) controlling imports and exports
of seeds to ensure that seeds are only imported,
if necessary, for a maximum of two years to avoid
dependence. Learning from the experiences of
red chilli farmers in East Java in terms of increasing
productivity and controlling prices, a number of
strategies could be extended to other regions as
follows:
First, promote contract farming to improve farmers’
negotiating position when cooperating with the
corporate sector. Through contract farming, farmers
would receive greater price assurance (refer to
Chapter 5: Strategic Issues). Farmer groups could
form cooperatives and work with commercial partners
through Cooperation Agreements. In East Java,
cooperation agreements between farmers represented
by a cooperative and the industry encompass
production quotas to be met by the farmers, product
quality standards acceptable to the industry as well as
normal prices and prices under certain conditions as a
farm-level reference. Production is marketed to meet
commercial demand (contracts), accounting for 95%
of total production, while the remaining 5% is used to
feed the local market.
40
Second, regulate and harmonise planting seasons at
production centres and secondary production centres in
order to diversify harvesting periods. Such regulations
would increase the availability of red chilli throughout
the year. Red chilli farmer cooperatives in East Java work
with the Indonesian Agency for Meteorology, Climatology
and Geophysics to accurately calculate the best planting
and harvesting periods. To mitigate the risk of a failed
harvest, farmer cooperatives also publish planting and
harvesting techniques for the monsoon and dry seasons
as farming guidelines, particularly for beginner farmers.
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NUSANTARA REPORT MAY 2018
Third, use technology to manage red chilli farming,
including the development of superior seeds. The use of
technology would lead to a more effective and efficient
land management, hence reducing production costs
and increasing margins. To access such technology, the
farmer cooperatives require access to capital through
contract guarantees from the industry.
Fourth, in the medium-long term, more business
models that leverage information technology need to be
developed, thus facilitating direct sales from the farmer,
or farmer group, to the end consumer.
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 BOX 6

INCREASING CACAO PRODUCTIVITY TO

SUPPORT THE TRADE SURPLUS

The Role of Agriculture and Cacao Production capacity utilisation in the cacao processing
industry could be further optimised. Currently, the
in the Economy
installed capacity of the national active cacao processing
Agriculture plays an important role in the regional industry stands at around 800,000 tons but capacity
economy of Eastern Indonesia. Agriculture has a utilisation remains restricted by the limited supply of
market share of around 16-17% of the regional economy domestic raw materials, amounting to just 300,000
of Eastern Indonesia and is the second largest sector tons. Consequently, most cacao demand is met through
after mining. Furthermore, the agricultural sector is also imports.
a key contributor to exports from Eastern Indonesia.
Cacao production in Indonesia has a vast opportunity
The main agricultural export commodities from Eastern
for improvement. Consistent with strong unmet global
Indonesia include cacao, crude palm oil (CPO), seaweed
and domestic demand, the development of cacao
and fish. Therefore, agricultural sector dynamics have a
plantations is a promising and viable option to strengthen
significant impact on the regional economy as a whole.
agricultural performance in Eastern Indonesia. Despite
Cacao is one of the leading commodities from the current decline of cacao production28 (Graph III.10),
Eastern Indonesia and nationally. Cacao production in a number of efforts to boost production have yielded
Indonesia, recorded at 290,000 metric tons in 2017, is promising results.
the third highest in the world. Around 69.3% of national
cacao production originates from plantations located in
Eastern Indonesia, primarily in Sulawesi. The main cacao
production centres are distributed in four provinces,
namely Southeast Sulawesi, South Sulawesi, West
Sulawesi and Central Sulawesi, with Central Sulawesi
the most dominant, producing an average of 100,600
tons per annum.

Global demand for cacao is tracking an upward

trend, backed by rising chocolate consumption that is
growing at around 8-10% annually, driven by Europe
and the United States. Nevertheless, global cacao Source: Department of Agriculture

production, at 3-5% per annum, has failed to keep pace Graph III.10. National Cacao Production and in Eastern Indonesia
with increasing global demand. Consequently, a supply
shortfall of 1 million tons is predicted by 2020 globally27. Several regional administrations have tried to
Similar dynamics are prevalent in Indonesia, where increase cacao production. The local government in
cacao demand for industry is met through imports, Southeast Sulawesi has intensively promoted plantation
which have grown in the 5-10% range since 2014. development by strengthening farmer groups at various

27
Source: Indonesian Cacao Association.
28
Cacao production has declined by around 25% compared with conditions 10 years ago.

43
NUSANTARA REPORT MAY 2018
production centres. Government backing is typically
in the form of land intensification, fertiliser assistance,
cultivation techniques and education as well as financial
intermediation. In addition, local governments have
expanded market access to the industry in order to
encourage farmers to increase productivity. Guarantees
to absorb production have motivated the farmers to
increase plantation productivity. Thus far, the various
efforts have increased cacao productivity from an average
of less than 1 ton per hectare to 1.6 tons per hectare.

Synergy between the corporate sector and cacao
farmers has also significantly increased production.
Corporate mentoring offered to the farmers has
resulted in significant productivity gains on plantation
land, especially in Central Sulawesi. The education
and mentoring program is actively extended to farmer
representatives in the form of intensive training
for 2-3 months, covering cultivation techniques
and entrepreneurship. Participating farmers
subsequently expected to pass on their knowledge
to other farmers in their respective environs. The
program has effectively increased productivity to 1.2
tons per hectare. Furthermore, this endeavour targets a
significant impact in the long term.
In addition, the government has also launched the
National Cacao Movement to increase plantation
productivity.29 The National Cacao Movement aims
to raise cacao production through extensification and
intensification programs, with the Movement divided
into three constituent parts, namely rejuvenation,
rehabilitation and intensification. One of the programs
is to engineer shoots and develop superior seeds as well
as fertiliser. Nevertheless, significantly production gains
have, thus far, failed to materialise (Graph III.11).
*VSD: Vascula Sheak Dieback caused by Ceraobasidium Theobtomae
fungus. This disease’s patogen spreading mainly through windbome and
attacks tissue vessels of cacao plants.
**Fusarium is a type of patogen gradually infecting vessels of cacao plants
by eliminating leaf cells before spreading to the roots.
Source: Indonesian Cacao Association
Graph III.11. Cacao Production
Cacao Production Challenges
Efforts to increase cacao productivity require
are
comprehensive handling to overcome the various
structural challenges as follows:
First, relatively old cacao plants, averaging more than
15 years, which have led to suboptimal production per
hectare30. Consequently, revitalisation and replanting
efforts are desperately required as have taken place
in other large cacao producers. Revitalisation and
replanting could be achieved through cooperation with
the corporate sector or by strengthening the existing
National Cacao Movement.
Second, the use of suboptimal production inputs
(certified seeds and fertiliser). The capacity of cacao
farmers must be improved considering the minimal
application of Good Agricultural Practices (GAP) and
technological innovation.

29
The National Cacao Movement aims to raise cacao production through extensification and intensification programs since 2009.
30
Cacao plant productivity in Sulawesi peaked at 2-2.8 tons per hectare but has since fallen dramatically to just 0.3-0.8 tons per
hectare.

44
NUSANTARA REPORT MAY 2018
Third, the diminutive smallholdings of cacao farmers Fifth, the prevailing trend of cacao land being allocated
undermine efficiency and prevent economies of scale. to other commodities (food crops, crude palm oil)
Strengthening farmer cooperatives into economic or developed for property, as has occurred in South
cooperatives would increase business scale, while Sulawesi, where cacao land has declined from 27,000
simultaneously expanding access to quality production hectares in 2014 to 20,000 hectares in 2017. Therefore,
inputs and enhancing technical competence (refer to spatial planning in rural areas is required considering
Chapter 5: Strategic Issues). the plan to develop cacao plantations, particularly in the
existing production hubs.
Fourth, increasing agricultural productivity requires
strong synergy amongst various parties. As a corollary
of government fiscal limitations, efforts to improve
cooperation between farmers and the corporate sector
must be strengthened. Several cooperation schemes
between farmers and the corporate sector have been
developed in various regions for different commodities
(Refer to Box 8).

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 BOX 7

EFFORTS TO BOOST FISHERIES PRODUCTION

Economic Role of the Fishing Over the past few years, fish production in
Eastern Indonesia has shifted from caught fish to
Industry in Eastern Indonesia
aquaculture. Currently, aquaculture accounts for 68%
National fish production continues to track an of total production, with growth averaging 34.35%
upward trend, supported primarily by aquaculture.31 per annum (Graph III.13). Fish production in Eastern
Congruent with the growing production of national Indonesia is dominated by tuna, flying fish, shrimp and
fishing industry products for export, shrimp sardinella.
and molluscs are also emerging as the leading
commodities.32 The export growth of fishing industry
commodities in Indonesia has also contributed to an
increase in state revenue33.

Eastern Indonesia represents one of the main

production centres of fresh fish in Indonesia. Based
on 2016 data, total fresh fish production in Eastern
Indonesia reached 3.41 million tons, accounting for
51.1% of total national production (Graph III.12).
The high level of production supported a fish supply
surplus in nearly every region of Eastern Indonesia,
Source: Ministry of Maritime Affairs and Fisheries
especially Maluku-Papua, where fresh fish production
contributes 31.5% of total production in Eastern Graph III.13. Fresh Fish Production in Eastern Indonesia
Indonesia.

Fishing industry products represent a mainstay of

Source: Ministry of Maritime Affairs and Fisheries
Graph III.12. Share of Fresh Fish Production in Eastern Indonesia
exports from Eastern Indonesia. Fish exports from
Eastern Indonesia totalled USD444.5 million, equivalent
to 1.30% of total exports from Eastern Indonesia in
2017. Growth of fish and shrimp exports was solid until
2016 but increasing domestic consumption, amongst
others, eroded export performance in 2017 (Graph
III.14 and Graph III.15). The major export destination
for fish products is Japan, which imports 30% of total
fish exports and 75% of total shrimp exports from
Eastern Indonesia.
Not merely an export commodity, fish products
from Eastern Indonesia also play a critical role in the
domestic fish processing industry. Based on IRIO 2010,

31
National fish catches stood at 6.04 million tons in 2017, with aquaculture totalling 17.22 million tons (Source: BPS-Statistics
Indonesia, preliminary 2017 data).
32
Total value of fish exports in 2017 reached USD4,089,000, up from USD3,782,000 in 2016 (Source: BPS-Statistics Indonesia data
as of November 2017).
33
Total non-tax revenue from fish products amounted to Rp491 billion in 2017, up from Rp358 billion in 2016.

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NUSANTARA REPORT MAY 2018
Source: Customs, processed
Source: BPS-Statistics Indonesia, 2014
Graph III.14. Fish Exports from Eastern Indonesia
Graph III.16. Fish Productivity

Source: Customs, processed

Graph III.15. Shrimp Exports from Eastern Indonesia

51% of fish products from Eastern Indonesia are used

as inputs for the fish, food and beverages processing
industries in Java and Eastern Indonesia. Fish produced
and caught in Eastern Indonesia supply 25.61% of the
demand from the fish processing industry in Java.
Notes:
l Surplus/deficit: average of fisheries surplus/deficit calculated from
production and consumption in 2015-2017, in 000 ton
l Inflatio: average of annual inflation 2015-2017. Red: above Eastern
Indonesia average; green: below Eastern Indonesia average.

The fishing industry in Eastern Indonesia has vast
potential for further development, supported by
increasing market demand. Fish commodities in Eastern
Indonesia have comparative advantage compared with
other regions of the Indonesian archipelago (Graph
III.16). The advantages are reflected in the higher levels
of fish production and productivity in Eastern Indonesia
compared with other regions, in terms of both caught
fish and aquaculture. The potential export market for
fish products remains vast, especially to the United
Figure III.5. Fresh Fish Surplus and Inflation in Several Provinces of
Eastern Indonesia
States. Meanwhile, the current focus of fish exports
from Eastern Indonesia is Japan.
In terms of inflation, fresh fish are a key contributor
to inflation in Eastern Indonesia. Regions with a fish
trade surplus experience intense inflationary pressures
on fresh fish (Figure III.5). Based on historical data over

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NUSANTARA REPORT MAY 2018
the past three years, inflation on fresh fish in most
regions of Eastern Indonesia has averaged more than
5%. High inflation despite abundant supply points
to post-production handling constraints. Inflationary
pressures on fresh fish are most intense in May-July and
November-December.
Fish Production Challenges
Fishing industry development in Eastern Indonesia,
through export diversification or inflation control,
faces the following challenges:
First, vast potential fisheries remain underutilised
by local fishermen due to the limited capacity and
capabilities of local fishing vessels. Capital constraints
remain the most binding impediment for fishermen to
access the requisite raw materials and capital goods.
Furthermore, the limited capacity of fishing vessels
demands immediate attention.
Second, policies to increase aquaculture are not
forthcoming, including efforts towards advanced
management techniques. Most aquaculture currently
targets the export market. Meanwhile, efforts to increase
production for consumption are absent and vulnerable
to intertemporal supply variations. Strengthening
aquaculture would be a near-term solution for
intertemporal fish production management.
Third, inflationary pressures on fish products are
influenced directly by consumer preferences for
fresh fish in Eastern Indonesia. Cold storage fish are
less desirable. Therefore, fresh fish production for
consumption is typically met through caught fish,
which is subject to the vagaries of the weather. Fresh
fish aquaculture for consumption is minimal due to
limited economies of scale. Thus far, local demand for
consumption does not provide sufficient incentives for
the development of fresh fish aquaculture.
Policy Strategy to Increase Fishing
Industry Performance
The Government has instituted several policies
supporting efforts to develop the national fishing
industry and maintain supply. Furthermore, the
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NUSANTARA REPORT MAY 2018
Government’s efforts have been honed and improved.
There are at least five salient policies implemented by
the Government as follows: (i) a moratorium placed on
fishing businesses; (ii) restrictions on the use of foreign
crew; (iii) restrictions on seine-haul fishing; (iv) policies to
overcome illegal fishing; and (v) a ban on transhipment.
Nevertheless, the policies are not oriented towards
improving aquaculture techniques or HR capacity.
Moving forward, additional efforts are required to
further develop the fishing industry in Eastern Indonesia,
including:
First, strengthen fishing cooperatives to increase
economies of scale, thus facilitating access to shipping
equipment, quality aquaculture inputs, government
assistance and education on technology-based
cultivation techniques (refer to Box 8). In 2017, the
Ministry of Maritime Affairs and Fisheries (KKP) provided
assistance in the form of 134 vessels to fishing groups
under a cooperative in Maluku, at the office of the
National Fisheries Port in Ambon.
Second, encourage the development of training facilities
to impart education on new fishing technologies.
Third, encourage the use of freestanding float net
cages that were introduced to Indonesia in 2017. The
technology, adopted from Norway, has a capacity
of more than 10 times that of simple nets (totalling
5,100m3 per net). In Eastern Indonesia, float net cages
are planned for deployment in Bali for yellowfin tuna.
Fourth, encourage the application of advanced fish
cultivation and management techniques in accordance
with international standards, including Hazard Analysis
and Critical Control Points (HACCP), the Bioterrorism Act,
certified sanitation quality and ecolabelling certificates.
Fifth, provide education and socialisation activities to
change public consumption patterns from fresh fish to
cold storage fish, as has been achieved in North Sulawesi
through the Gemarikan Movement.
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 BOX 8
CASE STUDY: THE IMPORTANCE OF INSTITUTIONAL
SUPPORT FOR FARMERS
Institutional Development of the
Farm Economy: Overview
The agricultural sector plays a key role in terms
of national economic development and stability
in Indonesia. The agricultural sector is a major
contributor to: (i) national food security; (ii) supply the
raw materials for the export-oriented agro-processing
industry; (iii) overcome economic inequality between
urban and rural areas; (iv) serve as labor-intensive
job sector; and (v) act as a buffer for environmental
sustainability and socio-cultural aspects of the
community. The strategic role of the agricultural sector
is, therefore, considered a priority when determining
the direction of national and regional development
policy.
Although agriculture is distributed fairly evenly
throughout nearly all regions of the Indonesian
Figure III.6. Farmer Institutions for Food and Horticultural Crops
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NUSANTARA REPORT MAY 2018
archipelago, the sector faces a number of challenges.
In terms of food security, the agricultural sector offsets
strong domestic demand. In addition, agriculture is
also required to generate value added and is one of the
main contributors to the trade balance. Nevertheless,
suboptimal productivity coupled with limited access
to quality inputs, markets and financing are often
cited as the main motives behind government policy
to strengthen farmer institutions. Pursuant to Act
No. 19 of 2013 concerning Farmer Protection and
Empowerment, the government has strived towards
institutional strengthening through the establishment
of farmer groups, farm clusters, and economic
agricultural cooperatives as well as by improving the
quality of extension services. Based on Act No. 19 of
2013, institutional strengthening encompasses 4 types
of farmer institution that translate into professional
agricultural management (Figure III.6).
In addition to top-down institutional strengthening
by the Government, several bottom-up concepts
targeting specific areas and commodities are being
developed in Indonesia. The overarching purpose
is to achieve economies of scale and farm efficiency,
while increasing production quality and improving the
farmers’ bargaining power. To that end, institutional
strengthening should be based on understanding the
characteristics of the problems faced by the farmers,
backed by communal commitment to the institutional
development measures introduced.
Institutional Development of the
Farm Economy: Food Crops
Various forms of farmer institutions for food crops
have been developed and are effective. Farmer
institutions covering a broad functional area, from
production to marketing, are not merely business
aggregators but also contribute to improving production
quality. Business aggregators need to clearly understand
market preferences in terms of product quality and
quantity. When implementing cooperation between
business aggregators and agricultural institutions, the
business aggregator plays a role in determining quality
production inputs, planting patterns and techniques,
technology application and the introduction of farm
mechanisation, including post-harvest handling. This
would have an auspicious impact on raising agricultural
productivity and product quality in line with market
demand and preferences.
The farmer institutions developed for horticultural
commodities are similar to those for food crops. The
main difference is that horticulture attracts big business
as off-takers of the produce as raw materials for
industry through contract farming. Farmer institutions
may be established independently by the farmers or as
independent businesses partnered with farmers.
Institutional Development of the
Farm Economy: Plantation Crops
Regarding plantation crops, most farmer institutions
have been developed as part of core plasma programs
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NUSANTARA REPORT MAY 2018
by the manufacturing industry. A solid example
of such resilient and evenly distributed programs
is found in the crude palm oil (CPO) industry. CPO
farmer institutions are based on farmer initiatives.
On the other hand, farmer institutions for the other
plantation crops, such as coffee, sugar cane and
cacao, are still comparatively limited.
Institutional Development of the
Farm Economy: Fisheries and
Livestock
Development of fishery and livestock institutions
are relatively limited compared to that of food
crops and horticulture. Based on a regional survey,
most fishermen and livestock farmers remain
unaffiliated with a farmer institution or even with
simple farmer groups. The prevailing rationale is that
cattle farming is considered an ancillary business and,
therefore, does not receive sufficient attention in terms
of optimising farm practices. Nevertheless, poultry
farming has been the beneficiary of institutional
strengthening through core plasma partnerships with
large enterprises. Currently, around 50% of domestic
poultry farming is controlled by large enterprises.
Future Institutional Development
Strategy for the Farm Economy
Institutional development requires the backing of
various organisations and institutes. Commitment
to support on and off-farm management
improvements must be strengthened to facilitate
agricultural transformation in Indonesia towards
greater productivity and value added. To that end,
the agricultural policy strategies of the central
government, provincial governments and regional
administrations must be synchronised and aligned. To
ensure further institutional development, openness
to advances in information and technology are one
road to success. Independent financial management
of farmer institutions is required through access
to adequate capital. To that end, breakthrough
alternative financing through nonconventional
channels must be explored, including FinTech that is
currently experiencing fast-paced growth. Furthermore,
institutional development requires the support of quality requires a shift in mindset from minimising production
human resources as agents of change. As such, the role costs to optimising production output, constituting the
of extension workers and local champions is required very essence of farmer prosperity.
to develop existing farmer institutions into economic
Table III.3. Case Study: Farmer Institutions
No. Location Institution Business Scheme
1 North Gapoktan, Commodity: Rice
Sumatra, BUMP
Cooperation/
Lampung
partnerships to improve
agricultural business
models and market
access
2 West Java Limited Commodity: Rice
Liability
• Cooperation between
BUMR
capital investors
and farmer groups
established as BUMR,
the second role is in
the form of stocks
• Partnerships to
increase production
sustainability and
food quality (on and
off-farm)
• Broader access
to marketing and
financing
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NUSANTARA REPORT MAY 2018
institutions. At its core, institutional development
Innovations Outcomes
• Improved production • Increased land
inputs productivity
• Improved planting • Increased access
techniques to capital through
microfinance
• Establishment of
institutions
microfinance institutions
for the members • Improved selling
prices
• Product marketing through
partnerships and online • Improved farmer
media income
• PIntegrated agriculture:
• Development of seeds
and organic fertiliser
• Capital assistance for • ±2,400 farmers and
production inputs ±1,000 ha of land as
(including machinery) and production partners
subsidies for the farmers’
• Production of 5,600
cost of living
tons per annum
• Extension of appropriate
• Turnover of Rp84
planting patterns and
billion per annum
techniques
• Bespoke own brands
• Application of Lost Harvest
with green label
Reserves (CRGP) totalling
certification
1%;
• Improved farmer
• Synergy between farmers,
income
micro enterprises,
microfinance institutions
and IT-based BUMR
• Improvements to post-
harvest management,
packaging and storage
• Broader access to
marketing
No. Location Institution Business Scheme Innovations Outcomes

3 Central Farm Commodity: Rice • Partnerships with farmers • Production cost

Java Equipment for farm management, efficiency
Services Unit • Gradual application including the provision of
(UPJA) of corporate production inputs • Increased land
farming, namely productivity and post-
land management • Managed use of scheduled production quality
(multiple landholders) mechanised agriculture (on
by one agribusiness and off-farm) • Increased number
of farmers affiliated
• Managed application • Extension of appropriate with a group and
of mechanised planting patterns and increased technology
agriculture from techniques uptake
planting to post-
production • Gradual land consolidation • Improved farmer
income

4 East Java BUMDes, Commodity: Rice
Gapoktan • Improving access to
irrigation through
production-sharing
schemes
• Absorption of farm
production and post-
harvest management
• Increasing
distribution and
marketing efficiency
• Improved irrigation through • Increased farm
pumping production
and expanded
• Partnerships with farmers partnerships
in 9 villages
• Improved post-
• Absorption of production harvest management
in the partner villages and quality
beyond
• Broader market
• Management, quality access for agricultural
control and marketing produce
• Product marketing to • Improved farmer
state-owned enterprises, income
modern markets and local
cooperatives

5 West Gapoktan Commodity: Shallots • Lowland shallot • Increased productivity

Sumatra
Optimisation of
communal farms
through improved
planting patterns and
techniques, technical
assistance on production
and institutional
management, as well
as increasing access to
financing and marketing
development
• Access to marketing through
the agribusiness subterminal
• Provision of cold storage
facilities
• Formation of agribusiness
microfinance institutions
• Non-collateralised (working
capital) financing scheme
• Broader access to
marketing (shorter
distribution chain)
• Improved quality of
product storage
• Agribusiness
microfinance
institutions with
assets totalling Rp1.6
billion in 2017

6 East Java Cooperative Commodity: Red Chilli
Partnerships between
farmer cooperatives and
the processing industry
• Contract farming overcomes • Increased farmer
selling price fluctuations income and market
access
• Weekly payments
• Guaranteed
• Aggregated farm production commercial supply
output for industry

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NUSANTARA REPORT MAY 2018
 Table III.4. Farmer Institutions for Plantation Crops
No. Location Institution Business Scheme Innovations
1 Aceh Cooperative Commodity: Coffee • Cultivation development,
pest control and post-
Partnerships with production
farmers, business
optimisation through • Coffee certification
production-side (Organic, Fair Trade, and
improvements, Rainforest)
management as well
as access to marketing • Cooperatives as coffee
and banking services off-takers through
collectors approved by the
cooperative in each farmer
group
• Coffee and export
management
• Innovation of noncash
services (m-banking) for
coffee farmers
2 West Java Community Commodity: Coffee • Organic coffee cultivation
Based through Joint Community
Increasing coffee Forest Management,
quality through accompanied by the
communal farming Sustainable Coffee
between farmers, the Platform of Indonesia
processing industry
and local cafes • Manged educational
coffee tours
3 Riau, Farmer Commodity: Palm • Become a legally
Jambi Association, incorporated association
Gapoktan Efforts to improve
communal farming to • Establishment of
increase production production assistance
and access to partnerships to apply
financing, while Good Agricultural
securing market access Practices (GAP)
• Establishment of
partnerships with
companies as off-takers
• Increased competitiveness
through sustainability
certification for oil palm
plantations
• Development of other
business units (seed
development, purchase
of fresh fruit bunches,
savings and loans)
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NUSANTARA REPORT MAY 2018
Outcomes
• ±5,049 farmer
partners
• Increased arabica
coffee production
• Improved selling
prices through
organic coffee
development
• Increased export
volume (recached
2,000 tons in 2017)
• Turnover growing
by Rp120 billion per
annum
• Increased coffee
quality and
consistency
• Recognition of coffee
recommended by
the SCAA Expo in
2016
• Assurance of raw
material supply to
US brands
• The first self-
sufficient farmers
in Indonesia to
receive RSPO (2013)
and ISPO (2017)
certification
• Partnerships with
international
and government
extension
institutions
• Lower production
costs and increased
productivity
• Broader access to
bank financing
No. Location Institution Business Scheme Innovations Outcomes

4 Lampung Core plasma Commodity: • Provision of funding and • Market assurance

farmer Sugarcane financing facilities to the
groups farmers (Cooperation
Corporate partnerships requirements: freehold
with farmers to expand land within a certain
access to working radius of the factory)
capital, better inputs
and appropriate • Funds for fertiliser,
planting patterns. farming equipment and
Companies are the pest control through
main off-takers reimbursement facilities
• Low-interest financing
facilities scheduled with
the harvesting cycle (6
months)
for the farmers and
assurance of supply
for the business
partner
• Application of
innovative planting
techniques
• Increased sugarcane
productivity

• Harvest schedule, total

and yield information
for the farmers and
independent partners
(land located outside of
the specified radius)

5 Southeast Public Commodity: Cacao • Application of cacao • Increased land

Sulawesi Economic cultivation technology productivity
Institution Formation of business
(LEM) – entities to improve • Raising the value added of • Turnover has
legally production, product cacao products reached Rp95.9
formed management and million
(notary) and access to marketing • Use of certified seeds
recognised and banking services • Increased farmer
by the local • Certified land income and
government prosperity

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NUSANTARA REPORT MAY 2018
EDITORIAL
Steering Committee

Aida S. Budiman

TEAM Advisor

Dewi Setyowati
Dwi Pranoto
Wiwiek S. Widayat

Chief Editors

Reza Anglingkusumo
Bambang Pramono

Authors
Departemen Kebijakan Ekonomi dan Moneter
Grup Asesmen Ekonomi

Retno Muhardini
Maximilian T. Tutuarima
Andi Widianto
Neva Andina
Ragil Misas Fuadi
Ide Mahendra

Regional I Department (Sumatera)

Agung Budilaksono
Dythia Sendrata
Bambang Irwanto
----
Regional II Department (Java)

Nurkholisoh Ibnu Aman

Hanan Mutiasari

Regional III Department (Eastern Indonesia)

Frida Yunita Sinurat

Deasy Ariyanti
Evy Marya Deswita Siburian
Donny Hendri Pratama

For more information contact:

Bank Indonesia
Economic and Monetary Policy Department
Economic Assessment Group
Ph. 021-2981 8119, 2981 8868
Fax. 021-3452 489, 231 0553

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NUSANTARA REPORT MAY 2018
 58
Jl. MH. Thamrin No.2 Jakarta REPORT
NUSANTARA 10350 - MAY
Indonesia
2018 | www.bi.go.id