News Briefs

Indonesia and the IMF





News Brief No. 98/2
January 15, 1998
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

Statement by the Managing Director on the IMF Program with Indonesia

The Managing Director of the International Monetary Fund (IMF), Michel Camdessus, said today in Jakarta that "As you know, an IMF staff team, together with Mr. Fischer (IMF First Deputy Managing Director) and myself, have over the last few days been discussing with the Indonesian authorities an acceleration and deepening of much needed reforms agreed under the IMF-supported program.

"This is why I am pleased today to announce that the government of Indonesia and the IMF have reached agreement on a much strengthened and reinforced economic program. Many of the measures in this program are new, others have been there from the beginning but are now being accelerated, but all have one common purpose: they aim to restore confidence in the currency and in the economy, by demonstrating that the government recognizes the problems confronting the country and is prepared to take the necessary measures to overcome them, even if they are difficult and painful.

"Let me summarize briefly the program that we have just agreed.

  • First, the broad macroeconomic framework. The program is designed to avoid a decline in output, while containing inflation to 20 percent this year, with the aim of bringing it back to the single-digit level next year, despite the sharp depreciation of the rupiah. At the same time, the external current account balance is expected to move from a deficit into a sizeable surplus, thereby generating additional foreign exchange to help the country to repay its external debt.


  • Second, the budget. The 1998/99 budget will be revised, to accord with the newly agreed macroeconomic framework, while still adhering to Indonesia’s long-standing balanced-budget principle. Based on the IMF presentation, this would imply that the budget would record a small deficit, of about 1 percent of GDP, a level that strikes an appropriate balance between the need to avoid an undue fiscal deterioration, and the need to avoid an undue fiscal contraction that would further depress economic activity. Nevertheless, to achieve this objective, serious measures will still be required. In particular, action will need to be taken to curb energy subsidies, which have grown to unsustainable proportions as the rupiah’s depreciation has pushed domestic prices far below world levels. Accordingly, the government will phase out subsidies gradually by raising both fuel and electricity prices in steps, except for those on kerosene and certain diesel fuels, where increases will be kept to a minimum, so as to protect the poor.


  • Third, fiscal transparency. In order to ensure that the public is kept fully informed of all government activities, the accounts of the Reforestation and Investment Funds will be brought onto the budget in 1998/99.


  • Fourth, public sector projects. Under current economic conditions, public spending must be limited only to those items that are of vital importance to the country. For this reason, the program envisages that development spending will be curtailed, including by canceling immediately the 12 infrastructure projects that were recently postponed or placed under review. Moreover, budgetary and extrabudgetary support and credit privileges granted to IPTN’s airplane projects will be discontinued, effective immediately. In addition, all special tax, customs, and credit privileges for the National Car project will be revoked, effective immediately.


  • Fifth, monetary policy. Monetary Policy will need to be kept firm for a sustained period, until confidence in the currency is restored. To signal the government’s commitment to this stance, Bank Indonesia will be given full autonomy to conduct monetary policy, and start immediately to unilaterally decide interest rates on its SBI certificates. As the program measures take hold and confidence returns, market interest rates should gradually begin to fall, while capital that has moved overseas should return to the country, providing the banks with sufficient liquidity to resume their lending activity.


  • Sixth, bank and corporate sector restructuring. It has become vitally important to restore the banking system to financial health and to alleviate the difficulties of the corporate sector. Specific plans to assist the banking system are now being formulated, which will be announced over the coming days.


  • Seventh, structural reforms. The program envisages that virtually all of the restrictions that have been put in place will soon be swept away. For instance:


  • From February 1, BULOG’s monopoly will be limited solely to rice. This means its existing monopoly over the import and distribution of sugar as well as its monopoly over the distribution of wheat flour will be eliminated.


  • To complement this action, domestic trade in all agricultural products will be fully deregulated, so traders will have the freedom to sell their goods wherever they want and to whom they want. The Clove Marketing Board will be eliminated, by June 1998.


  • As of February 1, all restrictive marketing arrangements will be abolished, leaving firms free to produce and export their products as they wish, and as the market decides. Specifically, the cement, paper, and plywood cartels will be dissolved.


  • Another pressing need in the current circumstances is to encourage foreign investment. Accordingly, for instance, by February 1, all formal and informal barriers to investment in palm oil plantation will be removed, while all restrictions on investment in wholesale and retail trade will be lifted.


  • Measures are also being taken to alleviate the suffering caused by the current, severe drought. The program envisages that community-based work programs will soon be introduced to sustain the purchasing power of the poor. In addition, to ensure that adequate food supplies are available at more reasonable prices, effective February 1, tariffs on all food items will be cut to a maximum rate of just 5 percent, while tariff rates on non-food agricultural products will be reduced by five percentage points.


  • Last, but not least, particular attention is being paid to the proper financing of small and mid-size enterprises and exporters. To make funds available for this purpose through the banking system, the Asian Development Bank is putting in place a program whose details will be announced shortly.

    "As you can see, this program has a very strong structural component, in the financial sector as well as in the corporate sector. The intensive involvement of our friends from the World Bank and the Asian Development Bank is therefore crucial for successful implementation. I am pleased that the staffs of our international organizations are cooperating effectively, and I am also happy to tell you that Mr. Wolfensohn, the President of the World Bank, will visit Indonesia shortly.

    ***

    "As President Suharto wishes to take personal responsibility for the quick and full implementation of the program, he has decided that the people of Indonesia must be fully informed of its content through the immediate publication of the Letter of Intent, which he has decided to sign personally. Moreover, he has decided that in order to ensure that the economic objectives are realized, he will appoint a high council of economic ministers--reporting directly to him--to oversee the implementation of the program.

    "In expressing my confidence in the success of this program, my thoughts go to those who may experience hardships--hopefully for only a short period of time--because of the very strength and rapidity of the adjustment process. The program provides for strengthened measures targeted to alleviating the plight of the most vulnerable people in the country. I would like the Government of Indonesia to know that the Management of the IMF is open to consider very favorably any adjustments of budgetary allocations in this domain, provided these are financed by a corresponding reduction of other budgetary expenditures of lesser priority, military or otherwise.

    "This revitalized program is bold and far-reaching, addressing all of the critical problem areas of the economy and deserving the full support of the international community. I am confident that, if this program is implemented with the determination and commitment that I myself have seen over the past two days, Indonesia should soon be able to begin to overcome its economic crisis," Camdessus said.


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