News Brief No. 01/87

News Brief: IMF Completes Third Review of Indonesia Program, Approves $395 Million Disbursement

September 10, 2001

The Executive Board of the International Monetary Fund (IMF) completed today its third review of Indonesia's performance under a three-year, SDR3.638 billion (about US$5 billion) Extended Fund Facility (See Press Release No. 00/4). This opens the way for release of a further SDR 309.65 million (about US$ 395 million) from the arrangement.

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

"The conclusion of the third review under the extended arrangement between Indonesia and the IMF is based on the adoption of early confidence-building measures, and the commitment of the new economic team to maintain macroeconomic stability and reinvigorate reforms. A significant improvement in market sentiment has already been achieved, and Indonesia has the potential to sustain a strong recovery of investment and output based on the firm and consistent implementation of the government's economic program.

"Indonesia's program aims to strengthen confidence by maintaining low inflation and sound public finances, while promoting the recovery of investment and output through accelerated asset recovery and structural reforms. The agreement on measures to keep the 2001 budget on course, including through safeguards to minimize the risks represented by fiscal decentralization, is an important signal of the government's commitment to macroeconomic stability. It is clear that achieving the planned non-inflationary financing of the budget will require accelerated enterprise privatization and IBRA asset recovery. The announcement of the main objectives for the 2002 budget, which aim at further fiscal consolidation by strengthening the revenue base and better targeting of expenditures and transfers, is welcome. Directors commended the authorities' plans to put into place mechanisms to cushion the poor against the impact of fuel price increases.

"The Indonesian government has taken important steps to address fragilities in the banking system. The replenishment of the governmental guarantee fund for depositors will maintain confidence in Indonesia's banks, and the planned sale by IBRA of strategic stakes in banks BCA and Niaga will serve as an important litmus test of the government's commitment to reprivatizing the banking system. Measures to improve the governance of state banks and enhance bank supervision are also essential elements of the financial sector reform agenda.

"Accelerating asset recovery and debt restructuring remain essential for reducing the debt burden, reviving investment flows, and securing the efficiency gains for sustaining growth. The Fund encourages IBRA to make renewed efforts to overcome recent delays and dispose of assets with improved governance and transparency. In this context, the Fund welcomes the government's commitment to making public the results of the Oversight Committee's independent reviews of IBRA's large restructurings, beginning with the first four reviews in August. The Fund recommends a more forceful implementation of the framework for corporate debt restructuring through the JITF. The work of both IBRA and the JITF will depend on taking forward, with greater vigor, legal reforms to tackle continuing debtor recalcitrance and improve the governance of the court system. Sustained progress in all of these areas will be key to lasting success of the program.

"In adopting the new measures, the Indonesian authorities have responded decisively to macroeconomic challenges and market uncertainty. The strengthened program deserves the strong support of the international community," Ms. Krueger said.