News Brief No. 02/120

News Brief: IMF Completes Seventh Review of Indonesia Program, Approves US$365 Million Disbursement

December 5, 2002

The Executive Board of the International Monetary Fund (IMF) completed today its seventh review of Indonesia's performance under a SDR 3.638 billion (about US$4.8 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$365 million), bringing the total amount drawn under the arrangement to SDR 2.262 billion (about US$3 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:

"Indonesia has made continued progress in program implementation since the last review. Macroeconomic developments in 2002 have been favorable, with steady economic growth, moderating inflation, and a strengthening balance of payments. However, the economic outlook has deteriorated as a result of the recent terrorist attack in Bali. The attack poses new challenges, which must be met, on the economic front, through the continued firm implementation of the government's reform program.

"Indonesia has made important progress during 2002 in laying the foundation for a durable improvement in macroeconomic fundamentals. After a small breach in the first quarter, 2002 budget execution has been brought back on track. The recently-approved 2003 budget strikes an appropriate balance between ensuring further fiscal consolidation to reduce the public debt and providing support for the economy in the aftermath of the Bali attack. The budget preserves development and social spending, while eliminating remaining fuel subsidies (with the exception of those on household kerosene). The budget also targets an appropriately ambitious non-oil and non-gas revenue increase through improvements in tax administration and additional tax policy measures.

"The prudent conduct of monetary policy has contributed to a further decline in inflation, which is expected to reach single digits by the end of the year. While there was some short-term weakness in the rupiah immediately following the Bali attack, the underlying strength of the currency has allowed a further easing of monetary conditions since the last review. A continued cautious monetary stance will be important to ensure that the program's inflation objectives are met.

"Continued recoveries of bank and state enterprise assets are an important element of the government's strategy to reduce the level of public debt. IBRA's broad-based loan sale program has been successfully concluded. The priority now is to press ahead with the sale of IBRA's remaining assets, and to collect payment from cooperating debtors under the revised terms of the bank shareholder settlement agreements, while taking enforcement actions against debtors who remain noncompliant with their settlement agreements. A sustained effort will also be needed to consolidate the momentum of the government's privatization program, which was reinvigorated with the sale of a small stake in PT Telkom and the launching of the sale of a strategic stake in Indosat.

"The momentum of bank divestment has been restored with the sale of Bank Niaga. The focus has now shifted to the sale of a majority stake in Bank Danamon, to be followed in 2003 with the sale of Bank Lippo and, thereafter, the remaining IBRA banks.

"Accelerated progress in implementing legal and judicial reforms and establishing the rule of law is critical to improve governance and strengthen the investment climate, which continues to suffer from the widespread perception of judicial corruption and weaknesses in the legal framework. Establishment of the Anti-Corruption Commission, ongoing reform of the commercial court, and revisions to the bankruptcy law will be important milestones in this effort," Ms. Krueger said.