News Brief No. 99/26

News Brief: IMF Executive Board Completes Indonesia Review and Approves US$450 Million Credit Tranche

June 7, 1999

IMF Executive Board Completes Indonesia Review and Approves US$450 Million Credit Tranche

Stanley Fischer, First Deputy Managing Director of the International Monetary Fund (IMF), said: "The Executive Board of the IMF met today to assess progress under Indonesia’s economic and financial program supported by the Extended Fund Facility¹ and completed the fifth review. As a result, SDR 337 million (about US$450 million) is available to Indonesia. This will bring total drawings from the IMF to SDR 7.1 billion (about US$9.5 billion).

"Directors welcomed the recent strengthening of market confidence, which had been reflected in greater exchange stability, further gains in the stock market, and declining inflation. As a result, considerable progress had been made in reducing interest rates, helping monetary policy become more supportive of recovery without compromising exchange rate stability.

"Directors considered that the recent developments pointed to a somewhat improved macroeconomic outlook for 1999. In particular, growth was expected to become positive and twelve-month inflation could fall toward the single-digit range by the end of this year. They stressed that fiscal policy should remain expansionary to support the recovery. In addition, with inflation falling and the exchange rate stable, there is room to reduce interest rates further thus improving the prospects for recovery. They cautioned that for Indonesia to realize this growth potential, and join the ranks of the other recovering Asian economies, a number of factors are crucial. Continuity in macroeconomic policies will be essential. There is also a need to deepen structural reforms.

"On the structural side, Directors saw the immediate challenge as being that of restoring a fully functioning banking system at a sustainable fiscal cost. Toward this end, early actions to raise loan collections, initiate asset recovery, and restructure the state and IBRA-controlled banks are essential. Successful implementation of such a program would help also to accelerate corporate restructuring. Both bank and corporate restructuring would be served by ongoing improvements to the institutional and legal framework, and they also placed a great importance on early and full implementation of recent anti-corruption legislation.

"For the medium term, Directors identified a number of issues which would have a bearing on fiscal sustainability. These include appropriately phasing fiscal decentralization, restoring the revenue to GDP ratio, and containing the fiscal cost of bank restructuring. They looked forward to discussing progress in the fiscal and structural areas in the context of the next review of the program," Fischer said.