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Press Release No. 03/43
March 28, 2003
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Completes Eighth Review of Indonesia Program, Approves US$469 Million Disbursement

The Executive Board of the International Monetary Fund (IMF) completed today its eighth review of Indonesia's performance under a SDR 3.6 billion (about US$5 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$469 million), bringing the total amount drawn under the arrangement to SDR 2.6 billion (about US$3.6 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 has continued to make good progress in implementing economic reforms under the program. Economic growth has been sustained, inflation has declined, the banking system has been strengthened, and asset recoveries have advanced. Nevertheless, weaknesses in the investment climate continue to hold back a more robust economic recovery. Sustained efforts for further reform will be necessary in the context of the 2003 program, to lay the basis for more rapid economic growth.

"Indonesia achieved a significant fiscal consolidation in 2002, with the budget deficit outturn well below the target of 2.5 percent of GDP. The 2003 budget builds on this accomplishment, and is expected to contribute to a further decline in public debt levels, while preserving key development expenditures. The sharp rise in oil prices led to a partial re-introduction of fuel subsidies. It will be important to reduce these subsidies as soon as possible, to enable a reorientation of expenditure priorities toward key social and development needs.

"Inflation has declined steadily in recent months and the rupiah has remained stable, allowing monetary policy to be more supportive of economic recovery. Looking ahead, monetary policy will need to continue to strike an appropriate balance between supporting the economy and contributing to a further reduction in inflation risks.

"Strengthening the financial sector is a central element of the program. With the launch of the sale of Bank Danamon, further progress continues to be made toward the goal of returning to private ownership banks that were taken over during the crisis. Further steps are required to strengthen the monitoring, governance, and accountability of state banks as they are prepared for divestment. Over the longer term, a key step will be the development of a comprehensive plan for the reform of the financial sector safety net, including the creation of a deposit insurance agency and the transition to an independent financial sector supervisory agency.

"The increased momentum of recoveries from IBRA loan sales and state enterprise divestment should be maintained. A key element of the strategy to maximize IBRA recoveries is the strict enforcement of shareholder settlement agreements, along with the initiation of legal actions against noncompliant former bank owners. In general, further progress in privatization is encouraged.

"Further progress in implementing legal and judicial reforms is critical to strengthen governance and improve the investment climate. Key steps will include operationalizing the Anti-Corruption Commission, strengthening the commercial court, and adopting amendments to the bankruptcy law," Ms. Krueger said.





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