News Brief No. 02/7

News Brief: IMF Completes Fourth Review of Indonesia Program, Approves $341 Million Disbursement and One-Year Extension of the Program

January 29, 2002

The Executive Board of the International Monetary Fund (IMF) completed yesterday its fourth review of Indonesia's performance under a three-year, SDR 3.638 billion (about US$4.5 billion) Extended Fund Facility (see Press Release No. 00/4). This opens the way for release of a further SDR 275.24 million (about US$341 million) from the arrangement.
The Board also approved Indonesia's request for a one-year extension of the current arrangement to provide time for the reforms envisaged in the program to take hold. Accordingly, the current arrangement will now expire on December 31, 2003.

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

"The fourth review under the Extended Arrangement between Indonesia and the IMF has been concluded on the basis of the relatively encouraging overall performance under the program, and the Board granted the two necessary waivers with respect to the structural performance criteria that were not observed. However, the conditions under which Indonesia is implementing its economic program have become more challenging since the third review. Market sentiment has been adversely affected by conflicting signals in some key areas, such as privatization, and continued concerns about progress on the broader reform agenda. These considerations highlight the need for firm and consistent policy implementation to boost market sentiment and spur a recovery in investment, which is essential to strengthen growth and reduce poverty.

"Indonesia's program aims at making progress in restoring market confidence and containing inflation, while promoting the recovery of investment and output through accelerated asset recovery and privatization as well as supporting structural reforms. In this context, the 2002 budget approved by Parliament represents a significant step toward ensuring medium-term fiscal sustainability. The timely implementation of the recent budget measures to reduce energy subsidies accompanied by measures to compensate the poor are welcome initiatives, as is the government's plan to strengthen tax administration in 2002. Securing available financing will depend importantly on implementing the structural reforms to access donor funding pledged at the November Consultative Group for Indonesia (CGI) meeting, and on moving ahead forcefully with Indonesian Bank Restructuring Agency (IBRA) asset recovery and the privatization of state-owned enterprises.

"Banking reform remains a key element of the government's economic program. The recent strengthening of prudential standards represents a further move to enhance public confidence in the banking system. It will also be important to avoid further delays in privatization efforts in the banking sector. The successful sale of majority stakes in Bank Central Asia (BCA) and bank Niaga will be key first steps in this regard. Improvements in state bank governance, enhanced financial sector supervision, and prompt resolution of any remaining bank weaknesses also remain essential elements of the banking reform agenda.

"Accelerating IBRA asset recovery and debt restructuring are essential to reduce the public debt, revive private investment flows, and secure the efficiency gains to promote stronger economic growth. In this context, the Fund welcomes the decision to set higher targets for IBRA asset recovery in 2002, the achievement of which will require 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 noncooperative bank owners. The government is considering a review of the bank shareholder settlement agreements currently in dispute. Due regard to the need to contain moral hazard, maximize recoveries for the government, and ensure that strong safeguards are in place to enforce compliance as well as maintain good governance will be necessary in this area.

"The government will need to make every effort to accelerate corporate debt restructuring under the Jakarta Initiative Task Force-led framework following the slowdown in 2001. It will also be important to give new momentum to other legal reforms aimed at tackling continued debtor recalcitrance and improving court system governance.

"In adopting a strong program for 2002, the Indonesian authorities have signaled their continued determination to respond decisively to the economic challenges and market uncertainty with which they are confronted. The program deserves the strong support of the international community. In this connection, the Fund supports Indonesia's request for an extension and rephasing of the current arrangement for a further year to provide more time for the reforms envisaged in the program to take hold," Ms. Krueger said.