## Press Release: IMF Approves Stand-By Credit for Indonesia

_IMF News, November 5, 1997_

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## Bibliographic details
- Published: November 5, 1997

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### Approval and Facility
- The IMF approved a stand-by credit for Indonesia authorizing drawings of up to SDR 7.338 billion (about US$10.14 billion) over the next three years.
- Immediate availability: SDR 2.2 billion (about US$3.04 billion).
- A further SDR 2.2 billion will be available after March 15, 1998, provided end-December performance targets have been met and the first review of the program completed.
- Subsequent disbursements will be made on a quarterly basis, subject to the attainment of performance targets and program reviews.
- The stand-by credit is equivalent to 490 percent of Indonesia’s quota of SDR 1,497.6 million (about US$2.07 billion).
- The IMF used the accelerated procedures under the Emergency Financing Mechanism (EFM), adopted in September 1995.

### Background and Crisis Context
- Long-term performance: real GDP growth averaged about 7 percent annually since 1970.
- Poverty reduction: incidence of poverty fell from over 60 percent in the late 1960s to 11 percent by the mid-1990s.
- Structural weaknesses highlighted:
  - Domestic trade regulations and some import monopolies creating rigidities.
  - Less transparency in business-environment decisions and data deficiencies.
  - Large capital inflows intermediated through a weak banking system.
  - Corporate sector exposure from unhedged foreign borrowing prompted by interest rate differentials.
- Since mid-July, an abrupt shift in market sentiment produced a major crisis of confidence:
  - Large rupiah depreciation and fall in equity prices.
  - Downward pressure on the rupiah persisted despite policies including floating the exchange rate, increases in interest rates, and fiscal retrenchment.

### Medium-Term Policy Strategy (three-year program supported by the stand-by arrangement)
- Objectives:
  - Stabilize exchange market conditions.
  - Ensure an orderly adjustment of the external current account to lower capital inflows.
  - Lay groundwork for resumption of sustained, rapid growth.
- Main policy components:
  - Maintain tight fiscal and monetary policies to stabilize financial conditions and narrow the current account deficit.
  - Prompt and decisive action to restore the health of the financial sector, including closing unviable banks.
  - Broad structural reforms: liberalization of foreign trade and investment, dismantling domestic monopolies, greater private sector participation in infrastructure, and expanded privatization.
- Fiscal transparency measures:
  - Increase transparency of public sector activities.
  - Bring off-budget activities into the budget to permit clearer assessment of the wider public sector’s financial position.

### Program for 1997/98 and 1998/99: Objectives and Fiscal Targets
- Main objectives:
  - Limit the downturn in growth.
  - Reduce the current account deficit to 2 percent of GDP.
  - Maintain gross official reserves at about 5 months of imports.
- Fiscal targets:
  - Aim at a surplus equivalent to 1 percent of GDP in central government operations, or 0.5 percent of GDP including the carrying costs of financial sector restructuring.
  - Measures required equivalent to 1 percent of GDP.
- Fiscal measures:
  - Postpone or reschedule major state enterprise infrastructure projects.
  - Increase revenues via excise tax increases, removal of some tax exemptions, and increases in non-tax revenues.
  - Tight monetary conditions to support fiscal policy.

### Financial Sector Restructuring
- Actions taken:
  - 16 unviable banks have been closed.
  - Weak but viable institutions required to formulate and implement rehabilitation plans quickly.
  - Steps to strengthen legal and regulatory environment, establish strong enforcement mechanisms and clear exit policy.
- Cost-sharing and guarantees:
  - Program developed with technical assistance from the IMF, the World Bank, and the Asian Development Bank (ADB).
  - Authorities determined that only a small portion of restructuring costs will be met from the public purse.
  - Government will compensate small depositors only, and not private shareholders and creditors.
  - Government will not guarantee any liabilities of private nonfinancial companies, domestic or foreign.

### Structural Policies and Market Reform
- Trade and tariff policy:
  - Continue comprehensive tariff reform initiated in 1995 with further reduction of tariff barriers.
  - Include reductions on items previously excluded: chemicals, steel/metal products, and fishery products.
  - Over the next three years, phase out remaining nontariff barriers other than those warranted for health, safety, environmental, or security reasons.
  - Implement ahead of schedule the WTO dispute panel ruling on special tariff preferences for the "National Car" if judgment is against Indonesia.
  - Reduce export taxes and open more sectors to foreign investment.
- Domestic competition and privatization:
  - Phase out import and marketing monopolies and price restrictions (except rice and refined sugar) over the next three years, starting with immediate elimination of import restrictions covering three key agricultural commodities.
  - Expand private sector role in infrastructure; establish a clear framework to level the playing field and assure investor confidence.
  - Implement regulations on government procurement and contracting; implementation guidelines to be issued by the end of 1997.
  - Shift responsibility for management and restructuring of public enterprises to the Ministry of Finance and establish a new Privatization Board.
  - Develop framework with explicit criteria for closing, restructuring, or privatizing enterprises; establish profit and performance targets to be made public and reported annually.

### Social Safety Net
- Protect expenditures in basic education, health, and other social services from budget cuts.
- Increase special assistance programs for poor villages under the next five-year development plan, Repelita VII.

### Financing Needs and International Support
- IMF funding: about US$10 billion (SDR 7.3 billion).
- World Bank and ADB contributions:
  - World Bank financing amount: US$4 1/2 billion.
  - Asian Development Bank financing amount: US$3 1/2 billion.
- Total first line of financing of the order of US$23 billion, taking account of other expected contributions and part use of Indonesia’s own external assets.
- Additional potential supplemental financing indicated by several important economies (including Australia, China, Hong Kong SAR, Japan, Malaysia, Singapore, and the United States) if unanticipated adverse external circumstances require additional resources.

### Indonesia: Selected Economic Indicators
- Real GDP growth:
  - 1994/5: 7.5
  - 1995/96: 8.2
  - 1996/97*: 8.0
  - 1997/98**: 5.0
  - 1998/99**: 3.0
- Consumer prices (end of period):
  - 1994/5: 9.6
  - 1995/96: 9.0
  - 1996/97*: 6.6
  - 1997/98**: 10.0
- Central government balance (Percent of GDP):
  - 1994/5: 0.2
  - 1995/96: 0.9
  - 1996/97*: 1.2
  - 1997/98**: 0.8
  - 1998/99**: 1.0
- External current account balance (deficit-) (Percent of GDP):
  - 1994/5: -1.8
  - 1995/96: -3.3
  - 1996/97*: -2.7
  - 1997/98**: -2.2
- Gross official reserves (Months of imports):
  - 1994/5: 4.9
  - 1995/96: 5.9
  - 1996/97*: 5.2
  - 1997/98**: (about) 5 months of imports (program target)
- Notes:
  - *Projected
  - **Program

*Press Release: IMF Approves Stand-By Credit for Indonesia, November 5, 1997.*

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## References

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_Source: https://www.imf.org/en/news/articles/2015/09/14/01/49/pr9750_