Press Release No. 03/165

Press Release: IMF Completes Tenth Review of Indonesia Program, Approves US$493 Million Disbursement

October 8, 2003

The Executive Board of the International Monetary Fund (IMF) completed today its tenth review of Indonesia's performance under a SDR 3.6 billion (about US$5.2 billion) Extended Fund Facility arrangement (see Press Release No. 00/4). This opens the way for release of a further SDR 344 million (about US$493 million), bringing the total amount drawn under the arrangement to SDR 3.3 billion (about US$4.7 billion).

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

"Indonesia's economic performance has continued to evolve favorably under the Fund-supported program, with a sustained economic recovery, a continued easing of inflation, and a further increase in external reserves. These favorable developments have bolstered financial market sentiment toward Indonesia, and have further reduced the economy's vulnerability to external shocks.

"Fiscal policy is on track, with the budget deficit outturn through the first half of the year well within the mid-year target for 2003. The government's 2004 budget proposal represents a further welcome step toward fiscal consolidation. To enhance Indonesia's tax base, the government is pressing ahead with efforts to strengthen tax and customs administration. Work is also proceeding with the restructuring of the Ministry of Finance, to strengthen its treasury and budget operations.

"The authorities are to be commended for the continued downward trend in inflation which, together with the stable exchange rate, has enabled interest rates to be reduced further in support of the economic recovery. Bank Indonesia's commitment to maintain a cautious monetary stance is also welcome given the need to consolidate the recent gains in inflation and exchange rate stability.

"The authorities have continued to advance important financial sector reforms, and the divestment of government ownership in banks is proceeding well. Efforts toward implementing the government's plan for a strengthened financial sector safety net, including the establishment of a deposit insurance scheme and clarification of the Bank Indonesia's role as lender of last resort, are well advanced. The on-going improvement in the health of the banking system is welcome, and the authorities are taking appropriate steps to strengthen the governance and monitoring of state banks. The structural reform program is also progressing in other areas. The Indonesian Bank Restructuring Agency is, for example, expected to complete its asset sales programs ahead of its scheduled closure in early 2004.

"Nevertheless, the authorities need to make further progress to strengthen the investment climate to enable Indonesia to realize its economic potential. They need to redouble efforts to strengthen governance and sustain the momentum of legal and judicial system reforms, for example, through the early establishment of the Anti-Corruption Commission.

"The government's decision to graduate from exceptional financing when the current arrangement expires is welcome. Indonesia's challenge is to maintain investor confidence through the continuation of sound policy implementation after the Fund-supported program concludes and as the 2004 elections draw near. The government's detailed "White Paper" laying out the economic strategy will play an important role in this regard. It will be essential for the government to ensure an adequate prioritization, and consistent and timely implementation, of reforms. The authorities can look forward to continued support with their policy implementation during the remainder of the program and to maintaining a close policy dialogue with the Fund thereafter in the context of post-program monitoring," Ms. Krueger stated.