Press Release: Statement by IMF Staff at the Conclusion of the 2005 Article IV Consultation Discussions with Indonesia

May 19, 2005

Mr. Stephen Schwartz, Senior Resident Representative of the International Monetary Fund (IMF) in Indonesia, made the following statement earlier today in Jakarta:

"An IMF mission led by Mr. Odd Per Brekk is completing a visit to Jakarta today that began on May 9 to conduct the 2005 Article IV Consultation discussions. Mr. Daniel Citrin, Deputy Director of the Asia and Pacific Department, also participated in some of the discussions. The team exchanged views with the government on the economic outlook and policy priorities. Based on these discussions, the team will prepare a staff report, scheduled to be presented to the IMF's Executive Board in mid-July.

"Economic growth has continued to gain momentum in 2005, as seen in the recently-released first quarter GDP figures. Encouragingly, growth has become more broad-based, with investment increasingly playing a supportive role. On the basis of these trends, and with steady implementation of the government's economic agenda, which is already yielding results, growth for 2005 is well on track to meet the authorities' target of 5½ percent, increasing in 2006 to 6 percent. At the same time, however, inflation has risen, due among other things to the recent adjustment of fuel prices toward international levels. Moreover, the pressures witnessed in Indonesia's foreign exchange and bond markets of the past few months are a reminder of the economy's susceptibility to shifts in sentiment toward emerging markets, which places a premium on sound economic policies.

"Against this background, the mission was encouraged by the government's continued determination to lay the basis for higher economic growth and reductions in unemployment and poverty. The government's medium-term strategy is well-tailored to achieve these objectives. More concretely, the mission supported the authorities' intention to further reduce the fiscal deficit aimed at lowering the public debt burden over time, monetary policy geared towards low and stable inflation, steps to strengthen the financial sector, and intensified drive to improve the investment climate, including by improving infrastructure, strengthening the legal framework, and enhancing governance. The authorities have kept their focus on this broad economic agenda, even while attending to the urgent needs in the aftermath of the tsunami tragedy.

"In the area of fiscal policy, the authorities reiterated their intention to keep the deficit for 2005 and beyond on a declining trend, while prioritizing spending on pressing social needs. They emphasized their ongoing efforts to enhance revenues through improvements in tax administration, and to improve the overall tax system. In the area of monetary policy, the mission supported Bank Indonesia's planned shift to interest rates as its operational target in mid-2005 as a step toward implementation of formal inflation targeting. Such a framework would enhance the transparency of monetary policy, and contribute to a gradual reduction in inflation toward trading partner levels.

"The mission was encouraged by indications that the health of the financial sector continues to improve, and welcomed the government's efforts to strengthen the sector. A number of steps have been taken to improve the governance of state-owned banks, and the mission conveyed its hope that the new management teams being installed will be successful in improving the banks' operations and finances.

"The discussions focused on other important areas of the reform agenda aimed at improving the investment climate. The mission supported the government's emphasis on addressing corruption, and encouraged that these efforts be supported at all levels of government, including through adequate budget allocations to relevant agencies and effective coordination among them. With respect to infrastructure the government noted that, following its successful infrastructure summit last January, progress had been made in attracting investor interest and in tendering a number of projects. The mission emphasized the importance of continuing with efforts to enhance labor market flexibility, which are key to reducing unemployment. Finally, regarding the oil and gas sector, the mission welcomed the government's adoption of a medium-term energy policy aimed at curbing consumption and raising oil production."


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