Memorandum of Economic
and Financial Policies
Government of Indonesia and Bank Indonesia
1. We have made significant progress over the past year in implementing
our economic program. Despite the setback from the tragic events in Bali
last October, the economic recovery continues and macroeconomic stability
has been maintained. Economic growth in 2002 was positive for the fourth
consecutive year, and real GDP has now recovered to its pre-crisis level.
At the same time, the balance of payments has strengthened, with a further
build-up in international reserves.
2. These positive developments were facilitated through sound macroeconomic
management and further advances in structural reforms. The fiscal deficit
outturn was well within the government's 2002 budget target, contributing
to a reduction in public debt. Important strides were also made in improving
tax administration and debt management. Bank Indonesia's (BI's) prudent
monetary policy stance led to a decline in inflation which, together with
the rupiah's stability, allowed interest rates to decline in support of
the recovery. In the financial sector, bank divestment gained momentum
with the sale of two banks taken over during the crisis and the launching
of the sale of a third. IBRA asset recoveries and privatization receipts
exceeded expectations. In the legal sphere, the Anti-Corruption Commission
(ACC) was established.
3. This Memorandum of Economic and Financial Policies
(MEFP) lays out our economic strategy for 2003, the final year of
the Extended Fund Facility (EFF) launched in January 2000. While much
has been achieved under the EFF, strengthening growth and employment prospects
by enhancing business competitiveness and fostering a more attractive
investment climate remains a key challenge. Our strategy for 2003 rests
on the vigorous implementation of the reform agenda, with special emphasis
on increasing non-oil exports and investment, sound debt management in
support of fiscal sustainability, and the rehabilitation and development
of vital infrastructure. Against this background, our program for 2003
is framed around the following objectives:
- consolidation of recent gains on the macroeconomic front through
the continued implementation of prudent fiscal and monetary policies;
- enhancement of financial system stability by further strengthening
the banking system, state bank governance, and the regulatory framework;
and
- improvement of the investment climate through legal and other structural
reforms.
4. In addition to the policies outlined in this memorandum, we will continue
our efforts in other areas, including rice policies, state-owned enterprise
reform, natural resource management, civil service reform, and poverty
reduction.
I. Macroeconomic Framework and Policies
5. The basic macroeconomic objectives for 2003 are as reflected in the
assumptions for the budget approved by Parliament in November 2002. The
framework targets GDP growth of 4 percent, and aims to reduce inflation
to 9 percent by year-end (Table 1).
Monetary Policy
6. Monetary policy will be geared toward maintaining a downward trend
in inflation and preserving broad exchange rate stability. Consistent
with this, and the need to support the economic recovery, BI has designed
a monetary program around a target range for base money growth of 13-14 percent
for end-2003. We will review the monetary stance throughout the year to
ensure that monetary policy remains consistent with the program's inflation
objective.
Fiscal Policy
7. The government is firmly committed to further fiscal consolidation
to reduce public debt to more manageable levels, while maintaining spending
on infrastructure and boosting the provision of key social services. In
2003, we are targeting a budget deficit of 1.8 percent of GDP, as
approved by Parliament in November. We are aiming for a significant increase
in non-oil tax revenues and higher outlays on priority social and development
programs. In January, we also adopted a package of tax measures to further
stimulate economic activity, that comprised a reduction in luxury taxes
on consumer goods, interim relief from the VAT for businesses, and an
elimination of income taxes for minimum wage workers.
8. The strategy to mobilize non-oil tax revenues centers on a continuation
of tax administration reforms initiated in 2002. In this connection, the
initial operations of the Large Tax Payer Offices (LTOs), now under way
since last September, have been promising. We will expand operations of
the LTO in Jakarta to more taxpayers while we evaluate an expansion to
other regions at a future date. The new electronic payment system will
be extended nationwide in 2003. In addition, we plan to expand the coverage
of corporate tax audits, intensify the collection of arrears, enhance
control of nonfiling taxpayers, and take steps to increase the taxpayer
population. The governance framework of Directorate General of Taxation
(DGT) will also be strengthened and extended to all tax offices nationwide
in 2003. The action plan for 2003 is shown in Annex A; a medium-term reform
plan is also under preparation. We have also initiated a comprehensive
strategy to reform customs administration, focusing on strengthening governance,
facilitating trade, and combating smuggling and tax evasion. Detailed
plans for the 2003 reform agenda will be ready for implementation by June.
9. Our aim remains to further reduce fuel subsidies, which are not well-suited
to helping the poor, and to shift our assistance to more targeted schemes.
The approved budget for 2003 had planned for the elimination of fuel subsidies
with the exception of those on kerosene consumed by households. However,
in view of the spike in international oil prices resulting from the prevailing
abnormal world market conditions, the government has decided to smooth
the adjustment of domestic fuel prices and temporarily restore some subsidies
until market conditions stabilize. Our deficit target for 2003, as well
as spending in priority areas, will not be affected. At the same time,
we have expanded programs to improve the welfare of low-income groups,
and are examining ways to improve their targeting on the poor.
10. To enhance the efficient use of public funds, the government intends
to take a number of steps to strengthen expenditure management. The initial
focus will be on strengthening the treasury and budget functions of the
Ministry of Finance. A blueprint for this reform, along with the timetable
for its implementation, is expected to be finalized in April. Once the
blueprint is in place, the government intends to establish dedicated task
forces by July to review the reform of the government's payment and receipts
system, consolidation of bank accounts, and the restructuring of budget
preparation procedures.
Financing and Debt Management
11. With regard to financing of the budget, we expect domestic sources,
consisting of receipts from IBRA asset sales and privatization, to provide
1.4 percent of GDP. This leaves a net external financing need of 0.4 percent
of GDP to be met by commitments from official creditors received at the
recent meeting of the CGI, from Paris Club rescheduling, and by other
official loans.
12. Our public debt management strategy aims to lower the budget's debt
service costs, and to minimize refinancing risk by improving the maturity
profile of our debt. The Government Debt Securities Law has been enacted,
and an interdealer market has been established to provide transparent
price discovery for market players. We are strengthening the regulatory
framework and developing the market infrastructure needed to enhance the
liquidity of the secondary market for government securities. We have also
issued decrees setting out the procedures for issuing government securities,
enabling auctions to begin on a regular basis. Moreover, the structure
of our debt has been significantly improved by the reprofiling of government
recapitalization bonds held by state banks, and the debt stock has been
reduced by using asset recoveries to redeem bonds. We intend to take further
steps to reduce the burden of the public debt through exchange offers
and debt buybacks. The agreement between the government and BI concerning
financial issues related to the BLBI has been presented to Parliament.
We will work closely with Parliament to ensure its timely implementation,
which will reduce the public debt burden while preserving the financial
soundness of the central bank.
Decentralization
13. While significant progress has been made, further work is needed
to strengthen the fiscal, legal, and administrative framework for decentralization.
A priority will be to strengthen the procedures governing the issuance
of regional regulations that have the potential to conflict with the national
interest. To this end, we intend to continue our efforts to enforce existing
reporting requirements and ensure compliance with government directives
canceling problematic regulations.
14. The development of an effective regional budget reporting system
also remains a priority. While some progress toward this objective was
made in 2002, with the finalization of the regions' 2001 accounts, further
efforts will be necessary in the coming year to establish a comprehensive
quarterly reporting system. The strategic aim remains to produce regular
quarterly budget reports within six months of the end of each quarter.
To ensure timely data submission, sanctions such as postponement of transfers
will be imposed on regions that fail to comply with the reporting requirements.
We have prepared a preliminary report on the regional budget outturn for
the first half of 2002, and aim to complete a report with coverage of
at least 85 percent of the regions by end-April; we also aim to produce
the full year report by June 2003. During the first half of the year,
the government will issue generally accepted government accounting standards
to ensure uniform reporting standards across regions. Existing regulations
on local government financial management will be modified in line with
these standards. New government accounting systems are being developed
to support the implementation of the forthcoming standards, and will be
introduced on a gradual basis over the course of the year.
15. A ministerial decree has been issued extending the existing moratorium
on local government borrowing (except through the center) until end-2003.
This is needed to provide additional time for the reporting system to
become fully operational. In the meantime, we are working to strengthen
the borrowing framework for regional governments. We are also putting
in place a framework to enable regions to borrow from external sources
through the central government.
Fiscal Transparency and Public Sector Governance
16. Improving fiscal transparency and public sector governance remain
priorities in 2003. We will continue our efforts at budget consolidation.
All remaining funds not previously consolidated will be brought under
the control of the central government by June 2003. The State Audit Agency
(BPKP) will continue its routine audits of government agencies with a
view to identifying any additional nonconsolidated funds. The main findings
of the audit of the Reforestation Fund completed last year have been submitted
to Parliament, and corrective action plans adopted. The primary actions
are to integrate its bank accounts into the Treasury and bring their use
under the control of the Ministry of Finance. The first progress report
on the implementation of the corrective action plans will be published
by September 2003. In addition, the main findings of the audits of the
two investment funds (RDI and RDA) completed last year have been submitted
to Parliament. Necessary corrective action plans will be developed by
the government in consultation with Parliament.
17. The performance of the public sector is also being strengthened through
the ongoing program of performance audits of state enterprises: (i) corrective
actions identified under the second round-audits are being carried out
(for Garuda, Pelindo II, Jasa Marga, Telkom, PT PN-IV), and a progress
report on their implementation has just been published; (ii) the third-round
audits (for PT Dirgantara, PT Kereta Api, PT Taspen, Semen Gresik, and
PT Pusri) are underway, and are expected to be completed by July, with
corrective actions beginning in August; and (iii) a fourth round of audits,
covering state enterprises in the banking, transportation, tourism, and
basic industry sectors, will be launched by June 2003, for completion
in early 2004.
18. The legal framework for public sector financial management is in
the process of being updated. The recently approved law on state finances,
which covers all state funds in all state institutions, and the draft
laws on state treasury and state audit, aim to improve accountability
and transparency in government financial management. We have asked Parliament
to prioritize the finalization of these laws. On our part, we are in the
process of revising the drafts in light of comments received from Parliament,
and intend to strengthen the drafts further to bring the legislation into
line with international best practice. Specifically, we would like to
ensure that the draft state audit law, which complements Law 5/1973,
does not undermine the constitutional authority of the Supreme Audit Agency
(BPK).
19. The government will also take steps to strengthen the framework for
auditing military and other foundations receiving state funds or financing
state activities. The government is preparing amendments to the Foundations
Law, to be presented to Parliament in its next session, to clarify the
legal basis for the BPK to undertake such audits.
Balance of Payments and External Policies
20. The external current account recorded another sizeable surplus in
2002, estimated at $7.2 billion (4.2 percent of GDP), facilitating
a further build-up in international reserves. The surplus, however, is
expected to narrow in 2003, as imports rebound and tourism receipts recover
only gradually in the aftermath of the Bali incident. The capital account
is also expected to remain in deficit. Even still, gross international
reserves are targeted to rise by $0.6 billion, sufficient to maintain
import coverage at current levels and to increase the coverage of short-term
debt.
21. The government remains committed to a liberal and open trade regime,
and will continue to honor its WTO and AFTA commitments. We will maintain
our dialogue with concerned IFIs on a regular basis to review our overall
trade strategy.
II. Structural Reforms
Financial Sector
22. A core objective of our economic strategy in 2003 is to further advance
the process of bank restructuring and to restore a strong, private sector-led
banking system essential for establishing efficient credit flows and reviving
investment. Accordingly, the 2003 program includes further significant
progress in the bank divestment program, and improving the governance
of state banks.
Bank Divestment and Restructuring
23. With regard to IBRA bank divestment, the sale of Bank Danamon has
been launched, and is expected to be completed by April. We also plan
to launch the sale of Bank Lippo in the second quarter, with a view to
completing its sale by end-September. The government remains committed
to selling the remaining IBRA banks by the time IBRA winds down in early
2004.
24. Our efforts to strengthen state bank governance center on steps to
improve oversight and accountability. First, we are strengthening the
capacity of the Ministry of State-Owned Enterprises to monitor state bank
performance, and additional staffing resources are being provided to the
Ministry for this purpose. Second, additional independent, qualified commissioners
will be appointed, with a view to ensuring that each state bank has four
to five commissioners by mid-year. Third, new annual performance contracts
will be prepared by April, which will contain benchmarks developed from
their annual business plans. And finally, the external audit mechanism
of state banks will be strengthened in the first half of the year, through
the development of follow-on external audit corrective action plans.
25. With respect to the restructuring and divestment of state banks,
the initial public offering (IPO) of Bank Mandiri is expected to be listed
in the second quarter, following the issuance of the final prospectus
in April. We intend to announce a strategic plan for the future of the
bank in the second half of the year. We also expect to launch an IPO of
shares in BRI during the second half of 2003. The strategy for BNI is
to implement its approved business plan that sets forth action items designed
to strengthen the bank, such as improving the quality of assets, developing
the information technology network, and continuing further divestment
efforts. We will develop, during the second quarter, a time-bound action
plan to resolve its impaired assets. With respect to BTN, external consultants
have been engaged to develop a restructuring plan, based on which we will
adopt a specific implementation schedule based on the plan by end-March
2003.
Financial Sector Safety Net
26. The Ministry of Finance, with inputs from Bank Indonesia, is developing
a comprehensive plan for a sound financial sector safety net, expected
to be completed by end-March 2003. The key elements of the plan are to
create a limited coverage deposit insurance scheme (LPS), an enhanced
lender of last resort function for BI, a framework for bank resolution,
and an agency that integrates supervision and regulation of the financial
sector (OJK). The plan will also set out criteria and procedures for bank
resolution through a Committee chaired by the Ministry of Finance with
representatives of OJK, BI, and LPS.
27. The plan will contain detailed proposals on the institutional structure
of the financial safety net and on sequencing and transitioning arrangements,
including measures for an orderly phase-out of the blanket guarantee.
In this regard, the first task will be to establish a deposit insurance
agency to administer a deposit insurance fund financed by premiums paid
by the banking sector, and with a role in bank resolution. We will also
give priority to a review of BI's lender of last resort function, including
any needed changes to the BI law, to ensure that it will be adequate to
provide emergency liquidity support to the banking sector once the blanket
guarantee is removed.
28. We are also preparing the groundwork for the new Financial Supervisory
Agency (OJK). Safeguards will be put in place to ensure the independence
of the new agency and that its funding arrangements provide it with adequate
resources to attract and retain staff with appropriate skills and experience.
The transition to the OJK will be managed carefully to ensure that financial
system stability and effective supervision are not undermined. We will
utilize an independent assessment of the supervision of the nonbank financial
sector against the relevant international standards, and will prepare
action plans to remedy any identified deficiencies prior to the transfer
of these functions to the new agency.
Bank Indonesia
29. We remain committed to improving the oversight and accountability
of the central bank, in a manner that preserves its operational independence.
In line with this objective, we intend to work with Parliament to enact
amendments to the central bank law that are fully consistent with the
recommendations of the independent panel of experts published in April
2001. In line with international practice, BI will also establish an audit
committee, whose membership will include outside experts, to subject its
internal financial policies and procedures to regular independent review.
As a follow-up to the recommendations from the mid-year review of its
foreign exchange operations, BI is taking steps to strengthen its control
and accounting procedures. Progress in this regard will be reviewed in
the context of BI's forthcoming 2002 annual audit, conducted by its constitutionally
appointed auditor. The process of restructuring BI's overseas subsidiary
is proceeding and its sale will be completed in the first half of 2003.
Assets removed in the restructuring process will be sold by the end of
the year.
30. As part of ongoing efforts to bring the banking supervision function,
currently located in BI, into line with international best practice, we
will reform the organization of this function to improve its efficiency,
accountability and internal coordination. This is expected to be completed
by September. Also, BI will establish by June a dedicated financial stability
unit to monitor the soundness of the overall financial system.
IBRA Asset Recoveries
31. The strategy remains to maximize recoveries from IBRA's remaining
assets, in advance of its scheduled winding-down. In this regard, IBRA
has announced a detailed plan for asset recovery, with quarterly targets,
to meet its annual asset recovery target of Rp 26 trillion.
To ensure transparency, the Oversight Committee (OC) is reviewing the
proposed asset sales mechanisms, and will provide any recommendations
regarding their strengthening to IBRA and the FSPC. The FSPC will publish
its decisions regarding the mechanisms chosen for these sales, as well
as its responses to OC recommendations.
32. We are nearing final resolution of the bank shareholder settlement
agreements. We aim to collect Rp 6-7 trillion from these agreements
in 2003. All noncash assets pledged or that have fallen due under agreements
with cooperative shareholders are being transferred to IBRA; this process
is planned for completion by May. We have collected the initial 30 percent
cash payment due from 9 out of 30 shareholders of banks closed in
1999 and 2000 (so-called APU cases) under the revised settlement
terms set out in the October 2002 FSPC decision. With regard to shareholders
of banks closed in 1998 who issued personal guarantees toward settling
their obligations (under the so-called MRNIAs), we will conduct forensic
audits to identify any additional shareholder assets that may be needed
to settle outstanding obligations under existing agreements. Full settlement
of the commercial terms stipulated under all the bank shareholder agreements
is due by June 2003.
33. As set out in Presidential Instruction No. 8 signed on December 30,
2002, the government remains committed to taking strong legal and other
enforcement actions against former bank shareholders who fail to meet
their obligations under their settlement agreements. We are increasing
the effectiveness of our enforcement strategy by including the original
Directors and Commissioners of noncompliant shareholders' banks in our
legal actions. The cases of five noncompliant shareholders were transferred
to the police and AGO in February, and IBRA is preparing to forward 12
additional cases to the legal authorities, thereby covering all shareholders
who failed to make the initial payment under the revised settlement agreements
for banks closed in 1999 and 2000, as well as two other noncompliant shareholders.
To those who have fulfilled their obligations under the shareholder settlement
agreements, the government is ceasing legal actions relating to any criminal
charges or other irregularities that gave rise to the agreements.
34. IBRA is finalizing its plans for the winding down of its operations.
Administrative preparations are well advanced and a strategy for the resolution
of any assets that may remain unsold at the end of IBRA's mandate will
be finalized and published by September 2003. The strategy will ensure
that adequate recoveries will be maintained, on the basis of full transparency
and accountability, after IBRA is closed.
Privatization
35. The government remains committed to its privatization program, which
is critical for improving economic performance and strengthening the public
finances. The divestment plan for 2003, which builds on the progress generated
in 2002, is designed to achieve the budget target of Rp 8 trillion.
The plan has been approved by the Privatization Committee chaired by the
Coordinating Minister for Economic Affairs.
Corporate Debt Restructuring
36. With the Jakarta Initiative Task Force's (JITF) mandate set to expire
on December 31, 2003, the strategic objective now is to process the
remaining 40 cases in its docket (total debt of $10.1 billion),
through either mediated resolution or dismissal. In 2002, the JITF met
its targets for debt restructurings, and by end-December the cumulative
total for JITF-mediated debt reaching the MOU stage amounted to $18.9 billion,
representing the debt of 86 companies. Going forward, the JITF aims
to process half of its remaining cases by July, and by November it will
issue a final report, setting forth its assessment of corporate debt restructuring,
and outlining the disposition of all major cases during the course of
its operations.
III. Policies to Improve the Investment Climate
37. While significant progress has been made under the program to restore
macroeconomic stability and advance the structural reform agenda, investment--the
engine of long-term growth and employment generation--remains weak. A
number of the policies described above will contribute to an improvement
in the investment climate. These include improvements to the decentralization
framework, strengthened tax and customs administration, improved public
sector governance, and maintenance of a liberal trade regime. In addition,
establishing certainty for investors with respect to the application of
commercial and bankruptcy laws, and improving the industrial relations
framework are also important for improving the investment climate.
Legal and Judicial Reform
38. The emphasis in 2003 will be on the further development of the Commercial
Court, which has jurisdiction over bankruptcy and intellectual property
rights cases. A number of steps have already been taken to strengthen
the administration and procedures of the Court, and to enhance the transparency
of the Court's decisions. The Blueprint formulated in 2001 for the development
of the Commercial Court has been key to this effort and an updated version
will be issued in May 2003. Going forward, emphasis will also be placed
on setting the Court's finances on a sounder basis. To maintain the capacity
of the Court and the transparency of its decisions, we will work with
the Supreme Court to restore the number of qualified ad hoc judges to
an adequate level.
39. With respect to other judicial reforms, the government intends to
work closely with the Supreme Court and other concerned parties to facilitate
the establishment of a Judicial Commission, an initiative central to strengthening
the governance and administration of the judiciary. The Supreme Court
is currently finalizing its proposals in this area, and the law establishing
the Commission is expected to be adopted by end-2003. Steps will also
be taken to ensure that the Anti-Corruption Commission (ACC) is fully
operational by no later than December 2003, as required by the Anti-Corruption
law. In this regard, the government intends to submit names of candidates
for the five positions of members of the ACC to Parliament by July 2003.
40. We intend to integrate the functions of the Independent Commission
for the Audit of the Wealth of State Officials (KPKPN) into the ACC, as
required by the Anti-Corruption law, in a manner that preserves the integrity
of the wealth declaration process. To this end, the government will issue
a decree by August 2003 that will ensure that the capacity to obtain and
analyze wealth declarations is maintained, and that the ACC has the powers
to enforce the wealth declaration requirements.
41. The government is working with Parliament to expedite passage of
amendments to the bankruptcy law, which is expected in the second quarter
of 2003. The amendments improve the existing law by adding definitions
and clarifications on a number of points that will make the law easier
to apply in practice.
Labor Policies
42. Establishing a sound framework for labor relations is central to
generating employment, improving the welfare and skills of workers, and
providing a stable environment for business. Following the major reform
of the rights of association and union activity in 2000, modernization
of complementary labor legislation relating to industrial relations has
become a priority. A bill relating to labor protection has now been passed,
and we are working closely with Parliament to ensure that the other bill
in this area, on industrial dispute resolution, is enacted during the
first half of 2003. We are working with labor and business to ensure that
the laws strike an appropriate balance between protecting the rights of
workers, including freedom of association, and preserving a flexible labor
market.
43. With the devolution of minimum wage setting to the regions, it has
become increasingly important to provide standards to guide the minimum
wage setting process to ensure that it is in accordance with the national
interest. To this end, we have recently reconvened the national tripartite
council comprising government, labor groups, and employers to consider
options for developing national guidelines in this area. The council will
be a regular vehicle to facilitate a national dialogue on broader labor
policy issues.
Table
1. Indonesia: Macroeconomic Framework, 2002–03
|
| |
2002
Prel. |
2003 |
|
| Real GDP growth |
3.7 |
4.0 |
|
| Inflation (end of period) |
10.0 |
9.0 |
|
| Current account balance |
|
|
| In billions of U.S.
dollars |
7.2 |
4.7 |
| In percent of GDP |
4.2 |
2.2 |
|
| Gross reserves (in billions
of U.S. dollars) |
32.0 |
32.6 |
|
| Central government balance
(in percent of GDP) |
-1.6 |
-1.8 |
| Revenues and grants |
18.6 |
17.3 |
| Expenditures and net
lending |
20.3 |
19.1 |
|
| Base money growth (end
of period) |
8.3 |
13-14 |
Table
2. Indonesia: Quantitative Performance Criteria (PC) and Indicative
Targets (IT) Under the Extended Arrangement, 2002-031
|
| |
| |
2002
|
|
2003
|
| Dec. |
|
Mar. |
Jun. |
Sep. |
Dec. |
|
|
|
| PC2 |
Actual |
|
PC |
PC |
IT |
IT |
|
| Monetary and fiscal targets |
|
|
|
|
|
|
|
| Net domestic assets
(NDA) of Bank Indonesia |
10.9 |
-16.8 |
|
-24.5 |
-19.4 |
-15.6 |
0.6 |
| Base money (indicative
target)3 |
138.2 |
132.2 |
|
129.3 |
134.5 |
138.1 |
150.4 |
| Overall central government
balance4 |
-42.1 |
-26.3 |
|
-7.6 |
-15.6 |
-25.6 |
-34.4 |
|
|
External targets (in billions of U.S. dollars)
|
|
|
|
|
|
|
|
|
Net international reserves (NIR) of Bank Indonesia5
|
18.8
|
22.2
|
|
22.2
|
22.2
|
22.2
|
22.2
|
|
Contracting or guaranteeing of new noncessional
external debt6
|
1.5
|
0.8
|
|
0.3
|
0.6
|
1.0
|
1.5
|
|
Of which: Government debt to commercial
creditors
|
0.2
|
0.1
|
|
0.2
|
0.2
|
0.2
|
0.2
|
|
Stock of short-term external debt outstanding
|
2.5
|
0.5
|
|
2.5
|
2.5
|
2.5
|
2.5
|
1Definitions are contained in the attached
Technical Memorandum of Understanding. Continuous
performance criteria are: the nonaccumulation of public external arrears
and no securitization or forward sale of receipts from natural resources.
2Adjusted program targets for NDA and NIR.
3Base money targets are one-month averages centered on
end-month.
4Cumulative balances from beginning of fiscal year (floor).
Central government bonds issued to district and provincial government
are included as financing of the central government deficit.
5Outstanding stocks (floor).
6Cumulative amounts from beginning of fiscal year (ceilings).
|
Table
3. Indonesia: Structural Benchmarks
|
|
March 2003
- Finalize comprehensive plan for financial sector safety
net.
- Formulate plans and targets for audits, tax arrears collection,
and registration of taxpayers.
- Collect at least Rp 3 trillion in cash by IBRA (net of
expenses).
- Adopt implementation schedule for the restructuring of
BTN.
April 2003
- Conclude majority divestment of Bank Danamon.
- Launch majority divestment of Bank Lippo.
- Finalize blueprint for strengthening the treasury and
budget functions of the Ministry of Finance.
- Issue ministerial decree liberalizing conditions under
which VAT refund claims may be approved.
June 2003
- Collect at least Rp 7 trillion in cash by IBRA (net of
expenses).
- List IPO for Bank Mandiri on the stock exchange.
- Appoint additional commissioners to ensure each state
bank has four to five commissioners in place.
- Launch a fourth round of performance audits of state enterprises.
- Produce report on 2002 local government finances, with
coverage of at least 85 percent of jurisdictions.
- Complete sale of BI's overseas subsidiary.
September 2003
- Collect at least Rp 18 trillion in cash by IBRA (net
of expenses).
- Launch IPO for BRI.
- Finalize strategy for the resolution of assets that may
remain unsold at the end of IBRA's mandate.
December 2003
- Launch majority divestment of remaining two IBRA banks.
- Announce strategic plan for future of Bank Mandiri.
- Complete the expansion of large taxpayers' offices to
increase coverage to 35 percent of the tax collections of
the Directorate General of Taxation.
- Ensure that the Anti-Corruption Commission is fully operational.
- Achieve budget privatization target of Rp 8 trillion.
|
|
Revenue Administration Initiatives for 2003
Key initiatives for strengthening revenue administration are set out
below.
March 2003, Directorate General of Taxation approves
an "extensification" program that will register 60,000
companies and 50,000 individuals. Ten percent of the individual registrants
will have income of at least Rp 100 million. A tax return for 2002
income and profits taxes will be secured from 60 percent of the new
registrants.
March 2003, Directorate General of Taxation formulates a
national audit plan for 2003 that provides for (nonrefund) audits
of 1,250 "large" taxpayers and 12,600 "medium-sized"
taxpayers.
March 2003, Directorate General of Taxation formulates
a national arrears collection plan for 2003 aimed at: (1) keeping
the stock of tax arrears deemed to be collectible at a level no higher
than that at the end of 2002, and (2) resolving 5 of the largest
10 arrears cases deemed to be uncollectible.
March 2003, Directorate General of Taxation formulates a
plan to control registered taxpayers who fail to file tax returns.
March 2003, Directorate General of Taxation prepares a plan
to further modernize the large taxpayer offices' taxpayer services,
audit, arrears collection, and information technology programs during 2003.
March 2003, Directorate General of Taxation and Directorates
General of Customs and Excises (DGCE) will reach agreement on a program
of cooperation with the National Ombudsman Commission (NOC) to
publicize the existence of the NOC, establish time standards for responding
to NOC recommendations on specific cases, and make summary information
available to the public two times per year on the actions taken by DGT
and DGCE in implementing NOC recommendations.
April 2003, the Ministry of Finance's Inspector General submits
to the Minister of Finance the first of four quarterly reports
detailing violations of the tax and customs codes of conduct, the
number of investigations initiated and completed, and the number and types
of sanctions imposed. Within two weeks of receipt by the Minister, summary
statistics from the report will be made available to the public.
April, 2003, Ministerial Decree issued that liberalizes the
conditions under which claims for VAT refunds may be approved without
requiring a pre-refund audit (but continuing to allow post-refund audits
on a selective basis), with a view to increasing the coverage of nonrefund
audits.
April 2003, Director General of Customs and Excises implements
the first phase of the customs administration modernization strategy
involving trade facilitation, combating undervaluation, and promoting
governance, and approves a detailed work plan for the balance of 2003
and 2004.
May 2003, the Minister of Finance will appoint a task force
(comprising private sector representatives and public sector officials)
to review all aspects of the value-added tax--including its policy
features, administrative provisions, information reporting requirements--with
a view to proposing ways to reduce the cost of compliance to taxpayers
and cost of administration to the government. A draft report will be submitted
to the Minister of Finance by September 2003 and final report by
December 2003.
June 2003, the electronic tax filing and payment system
will be expanded to process 75 percent of DGT tax collections.
The electronic payment system will also be introduced at one large customs
office and one large budget office to process the remittance of import
duties and taxes collected or withheld by these offices.
June 2003, the inter-ministerial task force will prepare
a government-wide anti-smuggling strategy. The strategy is to be
approved by the government and begin to be implemented by end-June 2003.
June 2003, Directorate General of Taxation prepares a
plan to expand the large taxpayer offices by December 2003 to
administer those taxpayers who collectively account for 35 percent
of total DGT tax collections.
June 2003, the government will allocate sufficient resources
to the National Ombudsman Commission to establish 5 regional offices
and create a telephone hotline by end of December 2003.
June 2003, the Ministry of Finance will streamline the procedures
by which it requests from BI access to a taxpayer's banking information
in cases where a bonafide tax audit has been initiated. The new procedures
will include appropriate safeguards to protect confidentiality and taxpayers'
rights.
July 2003, Directorate General of Taxation will instruct
tax offices to conduct tax audits of companies in the oil and gas sector.
July 2003, Directorate General of Taxation and the MOF Inspector
General's office will extend the governance framework for tax officers--including
the code of conduct, hotline for taxpayers to report misconduct by tax
officers, code of conduct committee, and special team of inspectors at
the Inspectorate General--at all DGT tax offices. A "Taxpayer Bill
of Rights" will also be introduced.
December 2003, Directorate General of Taxation will complete
the expansion of the large taxpayers' offices to administer those
taxpayers who collectively account for 35 percent of total DGT tax
collections.
December 2003, revise the Law on General Rules and Procedures
of Taxation and the Law Concerning Tax Collection and present to Parliament
for approval.
Indonesia: Technical Memorandum of Understanding
March 18, 2003
A. Monetary Targets
1. Performance Criterion on Net Domestic
Assets
|
| Outstanding Stock As
Of: |
Program
Limit
(In trillions of rupiah) |
|
| End-December 2002 (actual) |
-16.8 |
| End-March 2003 (performance
criterion) |
-24.5 |
| End-June 2003 (performance
criterion) |
-19.4 |
| End-September 2003 (indicative
target) |
-15.6 |
| End-December 2003 (indicative
target) |
0.6 |
|
| |
Net domestic assets (NDA) of BI are defined as the difference between
base money and net international reserves (NIR) of BI as defined in Section
D, converted into rupiah at an accounting exchange rate of Rp 7,000 per
U.S. dollar. Base money is defined as currency in circulation, bank deposits
at BI in rupiah, private sector demand deposits at BI, and the aggregate
reserve deficiency. The aggregate reserve deficiency is defined as the
amount by which aggregate statutory reserves against rupiah third-party
liabilities exceed bank deposits at BI.
The NDA targets will be subject to the following adjustors:
(i) In the event of shortfalls of balance of payments support from that
assumed in Section E, the ceiling on NDA will be adjusted upward by the
rupiah equivalent of the shortfall, up to a maximum of US$1.0 billion1
The ceiling on NDA will be adjusted downward by the rupiah equivalent
of any excess of balance of payments support over that set out in Section
E.
(ii) Changes in reserve requirements will modify the NDA ceiling according
to the formula:
where 
denotes the change in the ceiling on NDA of BI; r0 denotes
the reserve requirement prior to any change; B0 denotes the
rupiah reservable base in the period prior to any change; 
is the change in the reserve requirement ratio; and 
denotes the immediate change in the rupiah reservable base as a result
of changes in its definition.
2. Indicative Targets on Base Money
|
| Outstanding Stock of Base Money
As Of: |
Indicative Limit
(In trillions of rupiah) |
|
| End-December
2002 (actual) |
132.2 |
| End-March 2003 (indicative
target) |
129.3 |
| End-June 2003 (indicative
target) |
134.5 |
| End-September 2003 (indicative
target) |
138.1 |
| End-December 2003 (indicative
target) |
150.4 |
The indicative target on base money at the test date will be measured
as the average of its value from the first business day after the fifteenth
day of the month up to (and including) the fifteenth day of the following
month (or the last business day preceding the sixteenth day, if the fifteenth
day is not a business day). The target on base money will also be adjusted
by changes in reserve requirements according to the same adjustor applied
to NDA in the previous section.
B. Fiscal Targets
| 1. Performance Criterion on the Overall Central Government
Balance (Financing Side) |
| Cumulative Balance |
Floor
(In trillions of rupiah)
|
|
|
From January 1, 2003 to:
|
|
|
End-March 2003 (performance criterion)
|
-7.6
|
|
End-June 2003 (performance criterion)
|
-15.6
|
|
End-September 2003 (indicative target)
|
-25.6
|
|
End-December 2003 (indicative target)
|
-34.4
|
For the purposes of the program, all interest payable, including the
interest costs associated with bonds and other debt issued by the government
to cover the costs of bank restructuring will be placed above the line.
The fiscal balance is therefore defined as the negative of the sum of:
(i) net foreign borrowing; (ii) the change in net credit to the central
government from the banking system, excluding the amount of government
bonds, and excluding changes in the balances on the Haj account and the
deposit guarantee accounts (accounts 502 and 519); (iii) the change in
the stock of government bonds (excluding new issues of bonds to cover
the cost of bank restructuring); and (iv) net financing from all other
sources to the government, including receipts from privatization and divestiture.
Net foreign financing is defined as government foreign borrowing less
amortization payments (including debt prepayments) of foreign debt, with
transactions converted into rupiah each month at the average exchange
rates for that month. Net credit from the banking system is defined as
the change in net credit to government (including commercial loans and
the extrabudgetary funds), as reported in the central government accounts
in the monetary survey. Net financing from all other sources includes
receipts from the sale of government assets and recoveries of assets held
by IBRA, including any sale or swap of IBRA (or other government) assets
for government securities.
Monthly changes in government foreign currency balances will be converted
into rupiah at the average exchange rate (based on the rates reported
to IFS) prevailing for that month.
C. IBRA Asset Recovery
The target for IBRA's net cash recovery is defined as the sum of all
cash receipts stemming from transactions related to IBRA assets (including
but not limited to the sale of assets, debt service on loans, dividend
payments, and shareholder settlement payments) minus IBRA operating expenses.
Income from recapitalization bond interest and payments of deposit guarantee
premia are excluded.
D. External Sector Targets
| 1. Performance Criterion
on Net International Reserves of Bank Indonesia |
| Outstanding Stock As Of: |
Floor
(In billions of U.S. dollars) |
|
| End-December 2002 (actual) |
22.2 |
| End-March 2003 (performance criterion) |
22.2 |
| End-June 2003 (performance criterion) |
22.2 |
| End-September 2003 (indicative target) |
22.2 |
| End-December 2003 (indicative target) |
22.2 |
For monitoring purposes, net international reserves of BI (NIR) are defined
as (i)+(ii)-(iii):
(i) the U.S. dollar value of gross foreign exchange assets in foreign
currencies minus gross liabilities in foreign currencies; (ii) the net
forward position of BI; and (iii) reserves against foreign currency deposits.
NIR is based on the SDDS concept of gross reserves based on data from
the general ledger of BI. Accordingly, foreign exchange assets are defined
as those assets that are in convertible currencies, are under the direct
effective control of BI, and are readily available for such purposes of
BI as intervention or the direct financing of payment imbalances. Such
assets may be in any of the following forms, provided that they meet the
test of effective control and ready availability for use: currency, bank
deposits in nonresident institutions and government securities and other
bonds and notes issued by nonresidents (with a rating not below "A"
in the classification of Fitch IBCA and Standard and Poor's or "A2"
in the classification of Moody's). In addition, holdings of SDRs and of
monetary gold are included (provided that they too meet the test of effective
control and ready availability for use), as is the reserve position in
the IMF.
Excluded from the definition of gross foreign exchange assets are all
foreign currency claims arising from off-balance sheet transactions, claims
on residents, capital subscriptions in international financial institutions,
any assets in nonconvertible currencies, claims on any nonresident Indonesian-owned
institutions, or any amounts (in all components of assets, including gold)
that have been pledged in a direct or contingent way.
Gross foreign liabilities are all foreign currency-denominated liabilities
of contracted maturity up to and including one year plus the use of Fund
credit. Foreign currency liabilities to the central government are excluded.
All assets and liabilities will be valued using the exchange rates and
gold price shown in Section E.
The net forward position is defined as the difference between the face
value of foreign currency-denominated BI off-balance sheet claims on nonresidents
(forwards, swaps, options, and any futures market contracts) and foreign
currency obligations to both residents and nonresidents.
The NIR floors will be subject to the following adjustors:
(i) In the event of shortfalls of balance of payments support from those
assumed in Section E, the NIR floor will be adjusted downward by the amount
of the shortfall, up to a maximum of US$1.0 billion. The NIR floor will
be adjusted upward by the amount of any excess of balance of payments
support over that set out in Section E.
The adjustors and definition of NIR will be subject to review to take
account of new sources of financing not anticipated under the program.
| 2. Performance Criterion on Contracting or Guaranteeing
of New Nonconcessional External Debt |
|
Cumulative Change in Stock
|
Limit
(In billions of U.S. dollars)
|
|
|
From end-December 2002 to:
|
|
|
End-March 2003 (performance criterion)
|
0.3
|
|
End-June 2003 (performance criterion)
|
0.6
|
|
End-September 2003 (indicative target)
|
1.0
|
|
End-December 2003 (indicative target)
|
1.5
|
| |
|
The limit applies to the contracting or guaranteeing by the nonfinancial
public sector of new nonconcessional external debt2
with an original maturity of more than one year, which is defined as loans
containing a grant element of less than 35 percent on the basis of currency-specific
discount rates based on the OECD commercial interest reference rates.3
Excluded from the limits are credits extended by the IMF and balance of
payments support loans extended by multilateral and bilateral creditors.
Debt falling within the limit shall be valued in U.S. dollars at the exchange
rate prevailing at the time the contract is entered into, or guarantee
is issued.
| 3. Performance Criterion on Contracting
or Guaranteeing Debt to Commercial Creditors |
| Cumulative Change in Stock |
Limit
(In billions of U.S. dollars)
|
|
|
From end-December 2002 to:
|
|
|
End-March 2003 (performance criterion)
|
0.2
|
|
End-June 2003 (performance criterion)
|
0.2
|
|
End-September 2003 (indicative target)
|
0.2
|
|
End-December 2003 (indicative target)
|
0.2
|
| |
|
The limit applies to the contracting or guaranteeing by the central government
or Bank Indonesia of new debt to commercial creditors. Excluded from this
limit are export credits extended or guaranteed by official creditors.
| 4. Performance Criterion on the Stock
of Short-Term Debt Outstanding |
|
Outstanding Stock As Of:
|
Limit
(In billions of U.S. dollars)
|
|
| |
|
|
End-December 2002 (actual)
|
0.5
|
|
End-March 2003 (performance criterion)
|
2.5
|
|
End-June 2003 (performance criterion)
|
2.5
|
|
End-September 2003 (indicative target)
|
2.5
|
|
End-December 2003 (indicative target)
|
2.5
|
| |
|
The limits apply to the stock of debt of original maturity of one year
or less, contracted or guaranteed by the nonfinancial public sector. Excluded
are normal import-related credits, reserve liabilities of Bank Indonesia,
forward contracts, swaps, and other futures market contracts.
5. The non-accumulation of public external arrears during the
program period is a performance criterion and will apply on a continuous
basis. The program contains a continuous performance criterion that there
will be no securitization or forward sales of receipts from natural resources.
E. Program Assumptions and Reporting
|
|
| 1. Program Baselines for Balance of Payments Financing
Package |
|
Cumulative Amounts From
|
Floors
(In billions of U.S. dollars)
|
|
| |
BOP Support1
|
|
From end-December 2002:
|
|
|
End-March 2003
|
0.7
|
|
End-June 2003
|
2.0
|
|
End-September 2003
|
2.9
|
|
End-December 2003
|
4.2
|
1Includes all quick-disbursing balance of
payments support loans from multilateral and bilateral sources, including
similar loans channeled to the government budget and rescheduling
of government or Bank Indonesia debt-service falling due, but excluding
short-term loans that are reserve liabilities of BI as well as IMF
purchases. |
| 2. Exchange Rates and Gold Price to be Used Under
the Program1 |
|
|
Foreign Currency per U.S. dollar |
|
| Japanese yen |
104.85 |
| Deutsche mark2 |
1.8711 |
| Pound sterling |
0.61177 |
| French franc2 |
6.2753 |
| Swiss franc |
1.5339 |
| SDR |
0.72426 |
| Euro |
0.9567 |
| Gold price (U.S. dollars
per ounce) |
299.10 |
1Currencies not shown
here will be converted using the official rate for October 31, 1999
used by IMF's Treasurer's Department.
2Deutsche mark and French franc are converted against the
euro based on fixed conversion rates as of December 31, 1998. |
3. Reporting
Monitoring the program requires accurate and timely data. All information
on performance criteria, indicative targets, and balance of payments support
loans will be reported to Fund staff within two weeks of the reference
date with the exception of data on the central government balance, which
will be provided within one month. In addition, detailed data on government
revenues and expenditures, costs of financial sector restructuring, and
the monetary survey will be provided monthly within 30 days of the reference
date. Monetary statistics covering developments in the banking system,
including third-party liabilities, monetary accounts, and deposit and
lending rates will be provided monthly (with a five-week lag). Data on
base money (showing all the factors affecting reserve money), foreign
exchange intervention in both the spot and forward markets, as well as
use of reserves for financing and liquidity support will be provided daily
(with a 2-day lag). The net forward position, net foreign assets, liquidity
support to banks under various facilities, and open market operations
(including the stocks of SBIs and SBPUs) will be provided daily (with
a 2-day lag). Information on access by individual banks and nonbanks to
BI credit (either in rupiah or foreign currency) will be provided on request.
Debt stocks and associated flows broken down by both creditor and debtor
types and maturity will be provided on a quarterly basis.
BI will publish weekly, with 3-day lag, key monetary data, (which may
be subject to revision) including base money, gross international reserves
of BI, NDA of BI, and NIR of BI (the information could be made available
through special press releases and/or by updating BI's web site).
Within three weeks of the end of each month, IBRA will provide to Fund
staff its financial results of the most recent month and of the year-to-date,
as prepared by its Finance and Accounting Division. These data will be
broken down as follows: (i) AMC (receipts from loan work out, outsourcing,
core asset sales, noncore assets, and litigation); (ii) AMI (receipts
detailed by individual asset sales and/or dividends); (iii) BRU (receipts
detailed by individual asset sales and/or dividends); (iv) other income
(receipts detailed by investment income, guarantee premia, and other);
and (v) operating expenses.
1Converted
at the accounting exchange rate of Rp 7,000 per U.S. dollar.
2The term "debt" has the meaning set
forth in point number 9 of the Guidelines on Performance Criteria with respect
to Foreign Debt (Decision No. 12274-00/85, August 24, 2000).
3For loans with a maturity of at least 15 years,
the 10-year average commercial interest reference rates (CIRRs) published
by the OECD should be used as the discount rate for assessing the level
of concessionality, while the 6-month average CIRRs should be used for the
loans with shorter maturities. To both the 10-year and the 6-month averages,
the following margins for differing repayment periods should be added: 0.75
percent to repayment periods of less that 15 years; 1 percent for 15-19
years; 1.15 percent for 20-29 years; and 1.25 percent for 30 years or more. |
