Press Release No. 00/4

Press Release: IMF Approves US$5 Billion Extended Arrangement for Indonesia

February 4, 2000

The International Monetary Fund (IMF) approved today a three-year, SDR 3.638 billion (about US$5 billion) Extended Fund Facility to support Indonesia's economic and structural reform program. Of the total, SDR 260 million (about US$349 million) is available immediately, and further disbursements will be made available on the basis of performance targets and program reviews in the period ahead.

At the conclusion of discussions by the IMF's Executive Board on Indonesia's economic and structural program, Stanley Fischer, First Deputy Managing Director, made the following statement:

"The Indonesian authorities are embarking on a bold and comprehensive program aimed at restoring growth, entrenching low inflation, reducing the public debt, phasing out the dependence on exceptional financing, and normalizing relations with private capital markets.

"The program envisages continuity in monetary and exchange rate policies that have gained credibility as they have delivered low inflation, strengthened the rupiah, and facilitated declining interest rates. As confidence improves, and risk premia fall, there is room for further declines in interest rates, which remain high in real terms.

"The proposed fiscal deficit of 5 percent of GDP for FY 2000 strikes a careful balance between supporting the recovery and starting fiscal consolidation. Equally important are the tax reform measures to help rebuild Indonesia's tax base over the medium term. The authorities have also decided to reduce the untargeted fuel and power subsidies on a phased basis over this period. They are seeking to protect low income households temporarily from the associated price increases.

"The authorities have fully recognized that fiscal decentralization needs to be carefully managed to meet the political imperatives while maintaining fiscal neutrality.

"The reform program gives much greater direction to bank and corporate restructuring which should be carried forward in a more integrated manner under the auspices of the newly established Financial Sector Policy Committee. There is much strengthened emphasis on loan collection and asset recovery which need to be carried forward forcefully by IBRA. In this regard, IBRA's independence is imperative. The measures to change the incentive structure facing noncooperative debtors, together with the authorities' anti-corruption efforts, should help impart a much needed momentum to the debt restructuring process.

"The program includes a range of other structural measures. Institution building and governance are being given high prominence; privatization and energy sector reforms will help improve efficiency and strengthen public finances; and improved management of the natural resources will be given much more importance.

"The Fund, the World Bank, and the AsDB have collaborated closely in the discussions with the authorities on all the key elements of the program," Fischer said.

ANNEX

Background

Much was achieved under the previous extended arrangement (see News Brief No. 98/31), when Indonesia made significant progress in restoring macroeconomic stability, dealing with the financial crisis, advancing structural reforms, and assuring food security. The macroeconomic achievements included the virtual elimination of inflation, stabilization of the rupiah, and a recovery in foreign exchange reserves.

Despite these gains, more remains to be done to revive the real economy and lay the foundation for a sustained recovery that would increase employment and reduce poverty. These challenges constitute the principal agenda of the authorities' comprehensive economic program, supported by the IMF, that aims to accelerate the restructuring of Indonesia's economy and meet the remaining challenges.

Medium-Term Policy Strategy

Indonesia's Fund-supported three-year program has four main features (see "Indonesia Letter of Intent, January 20, 2000" at http://www.imf.org/external/np/loi/2000/idn/01/index.htm). First, the program is designed to make Indonesia's macroeconomic policy mix fully supportive of recovery while entrenching price stability. Second, the program is designed to reinvigorate bank, corporate, and other restructuring policies that are crucial to sustaining an economic recovery and achieving lasting poverty reduction. Third, Indonesia's program seeks to rebuild key public institutions which will strengthen the nation's capacity to implement economic and social policies with popular support, transparency, and good governance. Fourth, the program is designed to improve natural resource management, arrest the long-term deterioration in the environment, and ensure the sustainable use of natural resources for Indonesia's future generations.

Macroeconomic Policies Under the Program

The macroeconomic framework seeks to restore an annual growth rate in the vicinity of 5-6% by 2002, with an annual inflation target of below 5%. Although Indonesia's current account would weaken over the next several years as investment gathers pace, official financing and improvements in private capital flows should offset the decline in the current account surplus. The government debt-to-GDP ratio should decline by 2004 to around 65% from its recent peak of 100%, benefiting from falling interest rates and asset recoveries by the Indonesian Bank Restructuring Agency (IBRA). Key to attaining these objectives, however, will be a range of fiscal policy measures.

In FY 2000, the budget deficit of 5% of GDP seeks to strike a careful balance between supporting the economic recovery and starting the process of government debt reduction. While the budget considers gradual reduction of untargeted subsidies, it also proposes social safety measures to protect small households from the impact of the lower subsidies. Social spending will also include strengthening of targeted poverty-alleviation programs, supporting rice distribution, and providing health, education and employment services. Civil service wage reforms are envisioned, which are expected to be accompanied by anti-corruption efforts. Additionally, fiscal decentralization is to be implemented by June 2001 in a way that it is consistent with Indonesia's Regional Governance and Fiscal Balance Laws, and preserves the principle of fiscal neutrality.

Monetary and exchange rate policies are expected to continue to be fully supportive of the recovery process. The program for 2000 has been formulated to accommodate the anticipated higher growth, and private credit is expected to recover as bank and corporate reforms take hold.

Financial and Corporate Restructuring

Banking and corporate sector reforms are at the heart of Indonesia's economic program, and the government has adopted a bold agenda. The Financial Sector Policy Committee has been established with the mandate to provide leadership and direction in banking and corporate restructuring. The key objectives in bank restructuring efforts are to capitalize all the banks to 8% CAR by end-2001, as a precondition for eventually replacing the comprehensive guarantee scheme with a self-financed deposit insurance, to enhance efforts to restructure state banks, to ensure better governance and supervision of the banking system and IBRA, to deepen bond and equity markets, and to reinforce asset recovery efforts by IBRA.

In the corporate sector, the government has developed a bold new strategy to give fresh momentum to corporate restructuring that will include an active role for IBRA, and establishes procedures under which the government may direct non-IBRA-led cases to the Jakarta Initiative Task Force (JITF), and may refer cases to the Attorney general for the initiation of bankruptcy proceedings against those debtors who refuse to negotiate in good faith. Additionally, efforts to institute strong anti-corruption measures are also being taken.

Other Structural Policies

The new government has reviewed the privatization process, and adopted a new program for FY 2000 driven primarily by efficiency rather than budgetary considerations. Other structural reforms envisioned by the government include continuing and accelerating initiatives to improve the performance of Indonesia's energy sector, improving the domestic business environment to revive foreign direct investment, designing agriculture policy measures to maintain food security and promote efficient production, creating a strategic plan and consultative process to establish a national forest program that develops transparent and rules-based procedures for conservation of the remaining natural forests, and, more generally, improving environmental regulations and natural resource management over the next three years.

Financing Needs

In addition to the IMF's extended arrangement, the reform program will be supported by substantial financing from the World Bank, the Asian Development Bank, and bilateral official contributions, especially Japan. The Consultative Group for Indonesia, at a meeting in Jakarta during February 1-2, pledged up to $4.7 billion of support to Indonesia in addition to IMF financing for FY 2000.

Indonesia joined the IMF on February 21, 1967 and its quota is SDR 2,079.3 million (about US$3 billion). Its outstanding use of IMF financing currently totals SDR 7.5 billion (about US$10 billion).