Indonesia and the IMF

Press Release: IMF Completes Eleventh and Final Review of Indonesia's EFF Program, Approves US$505 Million Disbursement
December 19, 2003

Country's Policy Intentions Documents

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IndonesiaLetter of Intent

Jakarta, December 10, 2003

The following item is a Letter of Intent of the government of Indonesia, which describes the policies that Indonesia intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Indonesia, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

1. This letter marks the final review under Indonesia's Extended Arrangement with the Fund, which concludes at end-2003. Over the four-year period of the arrangement, macroeconomic stability has been restored, the banking system has been recapitalized, and most banks taken over during the crisis have been divested. In addition, balance of payments vulnerability has been reduced sharply with a fall in external debt and a rebuilding of foreign reserves. While important challenges remain, the key objectives under the program have largely been met, and we believe the external financing situation next year can be managed without further exceptional balance of payments support from the international community. Our Economic Policy Package announced in September reaffirms our efforts to foster economic growth by maintaining macroeconomic stability and further advancing structural reforms.

2. Turning to progress under our economic program for 2003, a good record of policy implementation has been achieved, and we are on track to meet our broad macroeconomic objectives. In particular, GDP growth of 4 percent in 2003 is expected, and inflation should finish the year at around 6 percent. With the global recovery gaining strength, GDP growth should pick up next year to close to 5 percent, and we expect inflation to remain moderate at 6 to 7 percent.

3. All end-September quantitative performance criteria were met; the indicative target on base money was exceeded by a small margin, but the target for end-December is expected to be achieved (Table 1). With regard to the September structural benchmarks set for this review (Table 2): (i) the IPO for BRI has been successfully completed; (ii) we have decided on the resolution strategy for assets that may remain unsold at the end of IBRA's mandate (see below); and (iii) while IBRA cash collections through September were somewhat lower than expected owing to a slight delay in certain sales programs, our cash collections are on track to meet the full-year target.

4. Achieving a sustainable fiscal position remains a key priority. The deficit outturn for the first three-quarters of the year was well within programmed levels. To achieve the 2003 program budget deficit ceiling of 1.9 percent of GDP, we are monitoring revenue developments closely and are exercising restraint over non-priority spending. Parliament has approved the 2004 budget, targeting a deficit of 1.2 percent of GDP. The budget strives to increase non-oil revenues through continued efforts to strengthen tax and customs administration, while preserving priority development and other social spending. With no further external debt rescheduling from Paris Club creditors, the financing of the budget will shift toward domestic sources.

5. The stability of the rupiah and decline in inflation over the past year have enabled Bank Indonesia (BI) to achieve a significant reduction in interest rates. The scope for further reductions in interest rates in the period ahead is now limited. Looking ahead, BI will continue to implement a cautious monetary policy stance. In this context, while we are preparing the groundwork for a gradual shift to a formal inflation targeting framework, monetary policy in 2004 will continue to be guided by a base money path consistent with our inflation objective.

6. Discussions with Parliament on amendments to the BI Law continue. We are working to reach agreement with Parliament on amendments to establish a lender of last resort facility administered by BI, a new financial supervisory agency in due course, and a supervisory body aimed at enhancing institutional credibility while preserving policy independence.

7. With regard to IBRA, as noted above we continue to make good progress toward asset sales. We are finalizing, ahead of schedule, the sale of a 51 percent stake in bank BII, and plan to sell another 20 percent to retail investors by the end of the year. The majority divestment of bank Lippo was recently postponed, due to unacceptably low bids, but was relaunched in December, with completion expected by February. The divestment of a majority stake in Permata, the remaining IBRA bank, will be launched in early 2004, subject to resolving outstanding legal issues. We are working on a plan to resolve outstanding obligations of IBRA's largest debtor, the Texmaco group. The plan would ensure that there will be no further public financial assistance to the conglomerate. It is based on the existing Master Restructuring Agreement signed between IBRA and the group in 2001, and aims to dispose of the group's exchangeable bonds held by IBRA in two bundles, with the textiles and engineering divisions offered separately so as to maximize investor interest.

8. IBRA's existing mandate expires in February 2004. We have decided to transfer the remaining assets to several self-liquidating holding companies for future disposal. These holding companies will be managed by the Ministry of State-Owned Enterprises. Until such time as the new deposit insurance agency is established, IBRA's deposit guarantee responsibilities will be transferred to the Ministry of Finance. Its bank resolution functions related to individual banks will be managed by Bank Indonesia and in systemic cases by the government in coordination with Bank Indonesia according to the prevailing banking and central bank laws.

9. As part of our efforts to restore the soundness of the banking sector, we are strengthening the oversight and accountability of the state banks. At bank Mandiri's shareholders meeting last September, we appointed additional independent commissioners, and we are also monitoring closely the bank's performance under its business plan. Also, a business plan for the bank is being drawn up for 2004, which we will review shortly. As has been well publicized, recent irregularities at BNI have surfaced, revealing serious control weaknesses in the bank's operations. We are taking prompt steps to address these weaknesses through changes in the bank's management, and the adoption of a time-bound action plan to strengthen the bank's internal controls.

10. We are also making progress to improve public sector governance, an important element of our structural reform agenda. The selection of commissioners of the Anti-Corruption Commission (ACC) is underway, and resources have been allocated in the budget for its operations. The appointment of the commissioners is expected to be completed by the end of December. These steps will enable the ACC to commence operations in early 2004. We remain committed to working with Parliament to ensure the expedited passage of amendments to the Bankruptcy and Foundations Laws, and the Judicial Commission Bill.

11. In view of the progress in policy implementation, we request completion of the eleventh review under the Extended Arrangement. The challenge in the period ahead will be to maintain investor confidence through the maintenance of sound policies. For this purpose, we are committed to the timely implementation of our Economic Policy Package, which aims to maintain macroeconomic stability, strengthen the financial sector, and generate higher investment, exports, and employment. As we implement our economic policies, we intend to maintain a close policy dialogue with the Fund and the international community.

Sincerely yours,

Dorodjatun Kuntjoro-Jakti
Coordinating Minister for
Economic Affairs
Minister of Finance
Burhanuddin Abdullah
Bank Indonesia

Table 1. Indonesia: Quantitative Performance Criteria (PC) and Indicative Targets (IT)

Under the Extended Arrangement, 2003 1/







PC 2/


PC 2/



Monetary and fiscal targets

Net domestic assets (NDA) of Bank Indonesia








Base money (indicative target) 3/








Overall central government balance 4/








External targets (in billions of U.S. dollars)

Net international reserves (NIR) of Bank Indonesia 5/








Contracting or guaranteeing of new noncessional external debt 6/








Of which: Government debt to commercial creditors








Stock of short-term external debt outstanding








1/ Definitions are contained in the Technical Memorandum of Understanding (EBS/03/35, Supplement 1). Continuous performance criteria are: the nonaccumulation of public external arrears and no securitization or forward sale of receipts from natural resources.

2/ Adjusted targets for NIR and NDA.

3/ Base money targets are one-month averages centered on end-month.

4/ Cumulative balances from beginning of fiscal year (floor). Central government bonds issued to district and provincial government are included as financing of the central government deficit.

5/ Outstanding stocks (floor).

6/ Cumulative amounts from beginning of fiscal year (ceilings).

Table 2. Indonesia: Structural Benchmarks

March 2003

Finalize comprehensive plan for financial sector safety net.

Formulate plans and targets for audits, tax arrears collection, and registration of taxpayers.

Collect at least Rp 3 trillion in cash by IBRA (net of expenses).

Adopt implementation schedule for the restructuring of BTN.



Rp 1.2 tn


April 2003

Conclude majority divestment of Bank Danamon.

Launch majority divestment of Bank Lippo.

Finalize blueprint for strengthening the treasury and budget functions of the Ministry of Finance.

Issue ministerial decree liberalizing conditions under which VAT refund claims may be approved.


June 2003

Collect at least Rp 7 trillion in cash by IBRA (net of expenses).

List IPO for Bank Mandiri on the stock exchange.

Appoint additional commissioners to ensure each state bank has four to five commissioners in place.

Launch a fourth round of performance audits of state enterprises.

Produce report on 2002 local government finances, with coverage of at least 85 percent of jurisdictions.

Complete sale of BI's overseas subsidiary.


Rp 9.7 tn

In process


September 2003

Collect at least Rp 18 trillion in cash by IBRA (net of expenses).

Launch IPO for BRI.

Finalize strategy for the resolution of assets that may remain unsold at the end of IBRA's mandate.

Rp 13.8 tn

December 2003

Launch majority divestment of remaining two IBRA banks.

Announce strategic plan for future of Bank Mandiri.

Complete the expansion of large taxpayer offices to increase coverage to 35 percent of the tax collections of the Directorate General of Taxation.

Ensure that the Anti-Corruption Commission is fully operational.

Achieve budget privatization target of Rp 8 trillion.