Press Release No. <a name="P16_75"></a>04/264

"An IMF mission led by Mr. Daniel Citrin, Deputy Director of the IMF's Asia and Pacific Department, has completed a visit to Jakarta during December 1-9 to conduct the second of twice-yearly post-program discussions. Mr. David Burton, Director of the Asia and Pacific Department, accompanied the mission during its last two days. The visit provided an opportunity for the mission to discuss economic developments and policy priorities with the new government. Based on these discussions, the mission team will now prepare a staff report, scheduled to be presented to the IMF's Executive Board in early February.

"While GDP growth is still below Indonesia's potential, and poverty and unemployment remain high, economic performance has continued to improve in recent months, and financial markets have rallied. This improvement has come about through continued sound policy implementation, and a favorable market response to the peaceful election outcome and policy intentions announced by the new government. Real GDP growth for 2004 as a whole is expected to reach 5 percent, and inflation, which showed signs of rising earlier this year, has subsided to around 6 percent.

"The mission was encouraged by the new government's determination to build on this progress by addressing the impediments holding back higher economic growth and further reductions in unemployment and poverty. The new economic team has rightly emphasized the importance of maintaining macroeconomic stability, while moving ahead forcefully with structural reforms to improve the investment climate.

"In the area of fiscal policy, the authorities agreed with the importance of reducing the budget deficit over time, in order to achieve a further steady decline in the debt-to-GDP ratio. They emphasized that they are seeking to contain an expected modest overrun in this year's revised budget deficit target. For next year, the mission welcomed the government's plans to continue the process of fiscal consolidation, and to channel spending toward high priority areas, particularly infrastructure and social programs. Over the longer term, the mission supports the authorities' plans to continue improving tax policy and administration, with a view to boosting medium-term tax revenues as well as strengthening the business climate.

"The mission welcomed Bank Indonesia's continued prudent conduct of monetary policy, which has kept inflation in check, and has contributed to a stable rupiah. Looking ahead, the mission was encouraged by the central bank's intention to continue reducing inflation toward trading partner levels, and to adopting an inflation targeting regime over the next couple of years.

"The favorable economic conditions have contributed to a further improvement in the financial health of the banking sector. The discussions in this area focused on the need to address remaining weaknesses at the state-owned banks, where asset quality remains below that at the privately managed banks. While recognizing the substantial progress that has already been made, the mission encouraged the authorities to continue with efforts to improve the governance of state banks, including internal controls and risk management. The mission welcomed the authorities' intention to ensure that lending by the state-owned banks continues to be based on sound commercial principles.

"The discussions also focused on other important areas of the structural reform agenda:

· Infrastructure. The mission agreed with the authorities' emphasis on the importance of upgrading Indonesia's infrastructure, including in the power sector, roads, and transportation. In addition to reprioritizing spending toward these needs, the government is, appropriately, seeking the participation of the private sector in infrastructure development. To this end, the mission encouraged the authorities to develop an appropriate framework to prioritize projects, and to help limit any potential future liabilities to the government.

· Legal and judicial reforms. The mission welcomed the authorities' intention to enhance the business climate by addressing governance issues. Efforts to increase the effectiveness of the Anti-Corruption Commission, operationalize the Judicial Commission, and implement the blueprints for the Commercial Court and the Supreme Court would be helpful in this regard. The mission also welcomed recent announcements that the government was seeking to resolve certain longstanding disputes with investors, as an important signal of the authorities' commitment in this area.

· Labor market flexibility. The authorities reiterated their intention to find an appropriate balance between protecting the rights of workers and addressing a number of uncertainties and rigidities in labor regulations. In particular, easing and clarifying severance pay requirements and regulations on contracting and outsourcing would help encourage investment and new hirings."