News Brief: Statement by the Managing Director on the IMF Program with Indonesia

IMF News, January 15, 1998

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Canonical URL: News Brief: Statement by the Managing Director on the IMF Program with Indonesia

Date: January 15, 1998
Issuer: Managing Director Michel Camdessus, International Monetary Fund
Purpose: Announcement of a "much strengthened and reinforced economic program" agreed between the government of Indonesia and the IMF to restore confidence in the currency and the economy.

Program objectives:
- Avoid a decline in output.
- Contain inflation to "20 percent this year, with the aim of bringing it back to the single-digit level next year."
- External current account expected to move "from a deficit into a sizeable surplus" to generate foreign exchange for external debt repayment.

1998/99 budget to be revised to accord with the new macroeconomic framework while adhering to Indonesia’s balanced-budget principle.
Fiscal outcome targeted: "a small deficit, of about 1 percent of GDP."
Measures to achieve target:
- Curb energy subsidies that have become unsustainable after the rupiah’s depreciation.
- Phase out subsidies gradually by raising fuel and electricity prices in steps, with exceptions:
- Subsidy increases minimized for kerosene and certain diesel fuels "so as to protect the poor."

Accounts of the Reforestation and Investment Funds will be "brought onto the budget in 1998/99" to ensure public information on government activities.

Development spending will be limited to items of "vital importance."
Immediate actions:
- Cancel immediately the "12 infrastructure projects that were recently postponed or placed under review."
- Discontinue budgetary and extrabudgetary support and credit privileges for IPTN’s airplane projects, effective immediately.
- Revoke all special tax, customs, and credit privileges for the National Car project, effective immediately.

Monetary policy stance: "kept firm for a sustained period, until confidence in the currency is restored."
Institutional change: Bank Indonesia will be given "full autonomy to conduct monetary policy, and start immediately to unilaterally decide interest rates on its SBI certificates."
Expected transmission: As measures take hold, market interest rates should "gradually begin to fall," and capital repatriation should provide banks with liquidity to resume lending.

Priority: "restore the banking system to financial health and to alleviate the difficulties of the corporate sector."
Status: Specific plans to assist the banking system "are now being formulated, which will be announced over the coming days."

Scope: "virtually all of the restrictions that have been put in place will soon be swept away."
Timetable and measures:
- From February 1, BULOG’s monopoly limited solely to rice; BULOG’s monopoly over the import and distribution of sugar and distribution of wheat flour will be eliminated.
- Domestic trade in all agricultural products will be "fully deregulated."
- The Clove Marketing Board will be eliminated "by June 1998."
- As of February 1, all restrictive marketing arrangements will be abolished (cement, paper, and plywood cartels to be dissolved).
- By February 1, all formal and informal barriers to investment in palm oil plantation will be removed.
- All restrictions on investment in wholesale and retail trade will be lifted.

Measures to alleviate hardship from the severe drought and adjustment:
- Community-based work programs to sustain the purchasing power of the poor will be introduced.
- Tariff changes effective February 1:
- Tariffs on all food items will be cut to "a maximum rate of just 5 percent."
- Tariff rates on non-food agricultural products will be "reduced by five percentage points."
Attention to small and mid-size enterprises and exporters:
- Asian Development Bank is putting in place a program to make funds available through the banking system; details to be announced shortly.

International cooperation: Intensive involvement of the World Bank and the Asian Development Bank; IMF notes effective cooperation among staffs. World Bank President Mr. Wolfensohn will visit Indonesia shortly.
Indonesian governance measures:
- President Suharto to sign the Letter of Intent personally and publish it immediately.
- President Suharto to appoint a high council of economic ministers reporting directly to him to oversee implementation.
Management offer: IMF Management "is open to consider very favorably any adjustments of budgetary allocations" to strengthen measures targeted at the most vulnerable, provided these are financed by corresponding reductions in other budgetary expenditures.

Program characterization: "bold and far-reaching," addressing critical problem areas with a strong structural component in the financial and corporate sectors.
Confidence expressed: If implemented with determination and commitment, Indonesia "should soon be able to begin to overcome its economic crisis."
Acknowledgement of hardship: The program recognizes potential short-term hardships and provides targeted measures for the vulnerable.

Source: News Brief: Statement by the Managing Director on the IMF Program with Indonesia (January 15, 1998).