News Brief No. 02/51

News Brief: IMF Completes Sixth Review of Indonesia Program, Approves US$358 Million Disbursement

June 21, 2002

The Executive Board of the International Monetary Fund (IMF) completed today its sixth review of Indonesia's performance under a SDR 3.638 billion (about US$4.7 billion) Extended Fund Facility arrangement (see Press Release No. 00/4). This opens the way for release of a further SDR 275.24 million (about US$358 million) from the arrangement, which would bring total disbursements under the program to SDR 1.987 billion (about US$2.6 billion).

At the conclusion of the Executive Board's discussion on Indonesia's economic and structural reform program, Anne Krueger, First Deputy Managing Director and Acting Chair, stated:

"The conclusion of the sixth review under the Extended Arrangement between Indonesia and the IMF is based on the continued strong performance under the program since the fifth review. Market sentiment and the macroeconomic outlook have improved. With continued implementation of the reform agenda, Indonesia has the opportunity to create the conditions for more rapid economic growth and a sustained reduction in poverty.

"Indonesia has made steady progress toward achieving its core economic objectives. The substantial fiscal adjustment envisaged in the 2002 budget is an important step toward ensuring medium-term fiscal sustainability. Although the first quarter deficit target was exceeded by a small margin, corrective measures have been adopted to bring budget execution quickly back on track. The authorities recognize that downside risks remain to the budget outlook and have reaffirmed their commitment to take additional measures as needed to achieve the annual budget target.

"The strengthening of the rupiah is encouraging, and inflation has declined in recent months despite increases in administered fuel prices. As a result, monetary policy has become more supportive of the economic recovery.

"Financial sector reforms continue to advance. The government has presented to Parliament a comprehensive plan for divesting the remaining IBRA banks. Conclusion of the sale of Bank Niaga, followed by the sale of Bank Danamon and Bank Lippo, will be important milestones under the program. Good progress has also been made towards resolving the long-standing BLBI issue, which will be an important step toward normalizing the financial relations between the government and the central bank.

"Enhanced asset recovery is essential to reduce public debt and promote corporate restructuring, and to this end, IBRA is pushing ahead with a new program of accelerated loan sales. Timely and resolute implementation of the government's strategy to increase compliance under the bank shareholder settlement agreements will also be important. The pace of privatization has lagged, however, and accelerated progress will be needed in the second half of the year.

"Legal and judicial sector reforms remain critical to a sustained improvement in the investment climate. A recent high-profile controversial ruling underscores the need for an acceleration of reforms in this area. More forceful progress is needed, notably with respect to creation of an anti-corruption commission, reform of the commercial court, and revision of the bankruptcy law," Ms. Krueger said.