News Brief No. 00/87

News Brief: IMF Completes Second Review of Indonesia Program, Approves US$398 Million Disbursement

September 14, 2000

The Executive Board of the International Monetary Fund (IMF) completed today its second review of Indonesia’s performance under a three-year, SDR3.638 billion (about US$5 billion) Extended Fund Facility (See Press Release No. 00/4). This opens the way for release of a further SDR 309.65 million (about US$398.94 million) from the arrangement.

At the conclusion of Executive Board discussions on Indonesia’s economic and structural reform program, Stanley Fischer, First Deputy Managing Director, stated:

“Indonesia’s economic reform program is at a crucial stage. The key objectives of the macroeconomic framework for 2000 are within reach. The economy has been growing since late 1999 and real GDP growth appears on track to reach the program target of 3–4 percent for this year. Inflation remains contained, despite a pick up in recent months reflecting the effects of exchange rate depreciation. The balance of payments is benefiting from higher oil prices, and gross reserves are above the program floor. However market sentiment, remains fragile amid continued doubts about the government’s ability to implement the economic program with consistency and good governance. The emerging recovery could quickly stall if market confidence does not take root.

“Against this background, Executive Directors welcomed the commitment of the new economic team to implement the program with full ownership, greater consistency and good governance. Directors consider that maintaining a sound macroeconomic policy framework will be fundamental to success. In this context, they are strongly of the view that, given the recent large increase in government debt, the process of fiscal consolidation should begin with the 2001 budget. This should be possible given the rebound in output that is taking place. The authorities’ continued commitment to a floating exchange rate system and an open capital account is welcome.

“Asset recovery and debt restructuring are the core structural challenges for sustaining growth over the medium term. In this context, the authorities need to take effective and comprehensive legal action against non-cooperative debtors and to achieve the targets set under the newly proposed schedule by the Indonesian Bank Restructuring Agency (IBRA) and the Jakarta Initiative Task Force (JITF).

“While much has been done to stabilize and strengthen the banking system, the bank restructuring agenda needs to be taken to a decisive stage. Many Indonesian banks still face major challenges in implementing financial and operational restructuring. A strong commitment to good governance in banks is essential, and will require intensive vigilance on the part of the supervisory agencies in Bank Indonesia and the Ministry of Finance. Ultimately, the best guarantor of bank governance and profitability is likely to be the accelerated privatization of the state banks combined with strengthened supervision.

“The government is committed to fiscal decentralization. The challenge is to develop a pragmatic and phased approach to decentralization that does not put the public finances at risk. International experience suggests that the macroeconomic risks associated with decentralization can be minimized if there is strict central control over borrowing by the sub-national governments, and by linking transfers of revenue to expenditure assignments and expenditure responsibilities. More generally, a major challenge is to improve the governance of public institutions. The program accords high priority to rebuilding public trust in the economic institutions and the judiciary. This goal is critical to the achievement of all aspects of the economic program, and success in this area will be vital to asset recovery and debt restructuring.

“With the continued strong support of the international community and resolute economic and political leadership in Indonesia, the strengthening of Indonesia’s economic reform program should lead to improvement in Indonesia’s medium-term economic outlook,” Fischer said.