News Brief No. 02/38

News Brief: IMF Completes Fifth Review of Indonesia Program, Approves US$347 Million Disbursement

April 26, 2002

The Executive Board of the International Monetary Fund (IMF) completed today its fifth review of Indonesia's performance under a SDR 3.638 billion (about US$4.6 billion) Extended Fund Facility. This opens the way for release of a further SDR 275.24 million (about US$347 million) from the arrangement.

At the conclusion of Executive Board discussions on Indonesia's economic program, Anne Krueger, First Deputy Managing Director and Acting Chair, stated:

"The completion of the fifth review under the extended arrangement between Indonesia and the IMF is based on the government's strengthened performance under the program, and the Board granted the necessary waivers to complete the review. Market sentiment toward Indonesia has responded favorably to recent progress in policy implementation, while the global economic environment has also become somewhat more favorable. In implementing its 2002 program, Indonesia has a further opportunity to embark on a positive cycle of enhanced policy implementation and strengthened economic performance, which can lay the basis for sustained growth and reduction in poverty. There is no room for complacency in the current circumstances.

"In 2002, Indonesia aims at further significant fiscal consolidation and lower inflation, while continuing to pursue structural reforms to promote bank and corporate restructuring, and encourage investment and a return of private capital flows. Achievement of the 2002 budget will represent a significant step toward ensuring medium-term fiscal sustainability. Implementation of the automatic mechanism for adjusting domestic fuel prices and the ongoing efforts to strengthen tax administration constitute important elements of the program. However, Indonesia will need to meet further important challenges in order to be firmly established on the path of medium-term fiscal sustainability. These include further efforts to strengthen fiscal decentralization and contain its associated risks. Indonesia's recent agreement on a successor Paris Club debt rescheduling has helped secure the external financing needed to support the government's economic program.

"Financial sector reform remains a key element of the government's economic program. The recent majority sale of Bank Central Asia (BCA) was a step toward returning ownership of the banking system to the private sector, and will be important for the government to build on this momentum, beginning with the planned sale of bank Niaga. Further improvements in state bank governance, and strengthened financial sector supervision, also remain essential elements of the bank reform agenda.

"Achieving the targets set for Indonesian Bank Restructuring Agency (IBRA) asset recovery in 2002 remains a key part of the economic program, given its role in promoting corporate restructuring and reducing the public debt. This will require a significant acceleration of IBRA loan disposal, progress in the sale of IBRA's bank holdings, and more decisive action with respect to the chronic problems with non-cooperative bank owners. With respect to the latter, forceful implementation of the government's new strategy for improving performance under the existing IBRA shareholder settlement agreements will send a needed signal of the government's commitment to the rule of law, and help facilitate improved asset recoveries. Further progress is needed also in the areas of corporate debt restructuring, and on legal and judicial reforms, which remain critical to a sustained improvement in the investment climate.

"In their early implementation of the program adopted for 2002, the Indonesian authorities have signaled determination to consolidate the progress made so far, and build a solid foundation for future economic recovery. The program deserves the continued strong support of the international community," Ms. Krueger said.