{
  "title": "Indonesia: The Challenge of Sustaining the Economic Recovery -- Address by Anoop Singh",
  "publication": "IMF News, October 4, 2000",
  "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/53/sp100400",
  "canonical": "https://www.imf.org/en/news/articles/2015/09/28/04/53/sp100400",
  "overlayPath": "/en/news/articles/2015/09/28/04/53/sp100400/index.md",
  "summary": "Delivered at the University of Indonesia, 50th Anniversary Conference",
  "publishDate": "2000-10-04",
  "sections": [
    {
      "heading": "I. Recovery from crisis",
      "content": "- Crisis peak conditions (mid-1998):\n  - Exchange rate reached a low of more than Rp 15,000 to the US dollar (compared with about Rp 2,500 before the crisis).\n  - Output declined by about 13 percent by the end of 1998.\n  - Banking system had virtually ceased to function; corporate sector weighed down by recession, inflation, and corporate debt.\n- Achievements since late 1999 / over the past two years:\n  - Output has been growing steadily for about a year; substantial consensus that Indonesia’s growth could reach 4 percent in 2000.\n  - Beginnings of recovery in both exports and domestic investment beyond initial domestic consumption dependence.\n  - Inflation kept low for much of the past year; rice prices had fallen by about 20 percent since their crisis peak.\n  - Rupiah stability: fluctuating in a range of Rp 8,000-9,000.\n  - Short term interest rates are in a much more supportive range, with room for further progress.\n  - Poverty rate—by most accounts—has fallen back sharply to well below its level at the peak of the crisis; falling rice prices contributed significantly.\n- Policies and institutional reforms underpinning recovery:\n  - Radical reorientation of monetary policy focused on targeting of base money; Bank Indonesia (BI) used open market operations to sterilize past liquidity support and keep growth in net domestic assets and base money broadly in check.\n  - BI allowed to freely adjust interest rates; since early 1999 BI brought interest rates down close to pre-crisis levels.\n  - Fiscal policy allowed to become expansionary with broadened targeted social spending programs (e.g., targeted rice distribution (OPK) scheme).\n  - Successive banking system reforms backed by a comprehensive guarantee on banking system liabilities, closure of insolvent banks, and recapitalization of virtually all remaining banks."
    },
    {
      "heading": "II. Market confidence and fiscal sustainability",
      "content": "- Current market sentiment and its effects:\n  - Market confidence has been volatile in 2000; volatility beginning to affect macroeconomic achievements.\n  - 12 month inflation rate has now reached about 7 percent, largely due to a more depreciated rupiah.\n  - Investors remain in a wait and see attitude; flight capital has yet to return.\n  - Renewed pressure on nominal interest rates; delayed corporate restructuring hindered.\n- Fiscal sustainability defined:\n  - Government must be in a position to repay debts now and in the future in an orderly way—without resorting to extraordinary measures.\n  - Simple measure: declining trend in the debt-to-GDP ratio, which generally requires economic growth to exceed the real interest rate.\n- Key fiscal and debt statistics:\n  - External public debt amounts to almost $70 billion, equivalent to around 45 percent of GDP.\n  - Domestic debt amounts to around Rp 650 trillion, accounting for another 45 percent of GDP.\n  - In all, government debt amounts to around 90 percent of annual output.\n  - By comparison: Malaysia’s and Thailand’s government debt are below 65 percent of GDP; Korea’s below 40 percent of GDP.\n  - Interest payments on government debt are already absorbing about one third of government revenue; the bulk will be paid on bonds issued to recapitalize the banking system.\n- Implications of high debt and market doubts:\n  - Investors’ doubts force higher interest rates (risk premia), which increase the budgetary burden and discourage new investment, detracting from growth.\n  - Historical international examples where concerns about fiscal sustainability kept interest rates well above inflation and contributed to low growth."
    },
    {
      "heading": "III. The strategy for fiscal sustainability and growth",
      "content": "- Overall objective and projection:\n  - Strategy: maintain favorable macroeconomic environment, pursue fiscal consolidation, and drive asset recovery to create a virtuous cycle of investment, lower real interest rates, and higher growth.\n  - Projections point to the government debt ratio falling to about 67 percent by 2004 if program fully achieved.\n- Three challenges to implementing the strategy:\n  - Pace of withdrawing fiscal stimulus must be carefully managed to protect the poor.\n  - Strong political consensus required for maximizing asset recovery—especially IBRA’s; hold firm against vested interests and recalcitrant debtors.\n  - Institutional weaknesses to overcome (e.g., develop a bond market virtually from scratch to facilitate roll-overs and attract a wider investor base with a well-functioning secondary market).\n- Principal avenues to reduce the debt ratio (with related recommendations and facts):\n  - Adjustment in the government budget:\n    - Crisis-related increases in subsidies, especially oil subsidies; untargeted subsidies presently amount to as much as 3 percent of GDP.\n    - Civil service reform: government wage bill has risen to above 5 percent of GDP because of successive and large wage increases over the past two years.\n    - Strengthen revenue base by rationalizing exemptions and tax holidays; eliminate diversion of significant revenues into off-budget accounts.\n  - Implement fiscal decentralization without adding to the budget deficit:\n    - Fiscal decentralization planned for 2001; international experience shows risk of rising general government deficit after decentralization.\n    - Preserve fiscal neutrality by ensuring expenditure functions are transferred to local authorities to match revenues (finance should follow function).\n    - Contain macroeconomic risks: strict limits on sub-national borrowing, particularly in early decentralization; bank lending to sub-national governments should be tightly controlled or even prohibited.\n    - Maintain overall budget framework flexibility by creating an expenditure margin as a contingency.\n  - Pursue recovery from publicly held bank and nonbank assets:\n    - IBRA controls assets with book value measured close to one-half of annual GDP and should return assets to private sector to raise factor productivity and attract foreign investment.\n    - Accelerating asset recovery is crucial; delay often leads to asset deterioration and lower sale prices.\n    - Bank asset recovery and nonbank privatization proceeds could be as important as budget deficit adjustment in reducing the debt ratio.\n    - Need coordination among institutions—especially IBRA and the JITF—and the government as owner of state-owned enterprises.\n  - Safeguard public resources from being used for additional bank recapitalization:\n    - Government debt rose primarily due to bank recapitalization costs during the crisis; previous episodes occurred in the 1990s.\n    - Ensure no further public-led recapitalization is required once present recapitalization is completed by:\n      - Enhanced supervision of the banking system and improved governance of state banks.\n      - Transforming banks into genuine intermediators of financial savings, ending directed lending practices and instituting proper appraisals and risk analysis.\n      - Privatization of the large state share in the banking system; government’s share of ownership in the banking system has risen to above 70 per cent."
    },
    {
      "heading": "IV. Concluding remarks",
      "content": "- Coordinated strategy to reduce government debt is essential to restore market confidence and sustain the recovery; international community committed to helping Indonesia meet these challenges.\n- IMF role: provide technical assistance, policy advice, and financial support for implementation of the economic program; the program is that of the government and international support is to aid implementation.\n\nInternational Monetary Fund — Address delivered at the University of Indonesia, 50th Anniversary Conference, October 4, 2000.\n\n---\n\n\n References\n\n- Indonesia and the IMF\n- Speeches\n- Anoop Singh\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp100400"
    }
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    "Published: October 4, 2000",
    "Crisis peak conditions (mid-1998):",
    "Achievements since late 1999 / over the past two years:",
    "Policies and institutional reforms underpinning recovery:",
    "Current market sentiment and its effects:",
    "Fiscal sustainability defined:",
    "Key fiscal and debt statistics:",
    "Implications of high debt and market doubts:",
    "Overall objective and projection:",
    "Three challenges to implementing the strategy:",
    "Principal avenues to reduce the debt ratio (with related recommendations and facts):",
    "Coordinated strategy to reduce government debt is essential to restore market confidence and sustain the recovery; international community committed to helping Indonesia meet these challenges.",
    "IMF role: provide technical assistance, policy advice, and financial support for implementation of the economic program; the program is that of the government and international support is to aid implementation.",
    "[Indonesia and the IMF](http://www.imf.org/external/country/IDN/index.htm)",
    "[Speeches](https://www.imf.org/en/news/searchnews)",
    "[Anoop Singh](https://www.imf.org/external/np/bio/eng/as.htm)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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