News Brief No. 99/46

News Brief: IMF Executive Board Completes Indonesia Review and Approves US$460 Million Credit Tranche

August 3, 1999

The Executive Board of the International Monetary Fund (IMF) today completed the sixth review under the Extended Fund Facility (EFF) for Indonesia. As a result, SDR 337 million (about US$460 million) is available to Indonesia.

Stanley Fischer, First Deputy Managing Director, made the following statement: "During today's discussion, Executive Directors welcomed the improvement in the performance of the Indonesian economy in recent months and the strengthening signals of an incipient recovery in real output. They also welcomed the improvement in market confidence based on both the successful elections and implementation of the Indonesian economic program, reflected in gains in a broad range of financial indicators, notably in the appreciation of the exchange rate of the rupiah, and the sharp upturn in equity prices. Negative inflation continued through July, marking five consecutive months of declining prices.

"The IMF program has continued to be on track, and Directors stressed the importance of maintaining program implementation during the remaining period of transition to a new government. The agreed monetary policy stance should permit a further gradual and market-led decline in interest rates, given the sizeable output gap and the absence of inflation. Exchange rate policy should continue to be implemented flexibly so as to accommodate market pressures. In the near term, fiscal policy should deliver the planned stimulus necessary to promote recovery. In this connection, Directors referred in particular to the need for a well-targeted, and effectively-monitored increase in expenditures on a strengthened social safety net and other socially related programs.

"Directors emphasized that the restoration of strong and sustainable growth requires an acceleration of structural reforms, especially in bank and corporate restructuring. With regard to the banking sector, the priorities should be to improve loan collection and asset recovery, to restructure and then recapitalize the state banks, to prepare for early privatization of the banks that have been taken over by the Indonesian Bank Restructuring Agency (IBRA), and to improve bank supervision. While the institutional framework to deal with corporate debt is in place, Directors emphasized the need now to ensure its effective use by creditors and debtors in negotiating settlements. They also emphasized the need to strengthen and accelerate the implementation of bankruptcy procedures. Directors encouraged the authorities to proceed only with great caution in implementing their fiscal decentralization plan so as to ensure that macroeconomic control is maintained and regional disparities are not exacerbated.

"Directors recognized that the economic recovery is still at an early stage, and emphasized the need for continued careful implementation of agreed macroeconomic and structural policies to ensure that recent achievements are preserved and enhanced as the political environment changes," Fischer said.