Mr. Horst Köhler
International Monetary Fund
Washington, D.C. 20431
Dear Mr. Köhler:
The new government that took office in mid-2001 has sought to recover momentum in Indonesia's economic reform process. Our initial efforts have focused on policies to achieve the original 2001 budget deficit target of 3.7 percent of GDP and to reinvigorate reforms in the core areas of IBRA asset recovery and bank resolution. To that end, we have reviewed the government budget and have taken steps to ensure that the deficit outcome is in line with the target, and that expected shortfalls in financing are minimized to avoid undue spending compression. As regards IBRA asset recovery, while the end-September target could not be achieved by a small margin, we are confident that the target for the year as a whole will be realized.
The new government has also formulated its comprehensive economic program for 2002, which is described in the attached Memorandum of Economic and Financial Policies. Underpinning our macroeconomic policy objectives for the year is the budget approved by Parliament in October, which targets a reduction in the deficit to 2.5 percent of GDP. In the area of monetary policy, our program aims to reduce annual inflation to single-digits by end-2002. Structural reform efforts will continue to focus on the core areas that impinge upon macroeconomic stability: financial sector reforms, privatization and asset recovery, and legal and governance issues.
While the original objectives of the three-year program supported by the Extended Arrangement with the Fund remain relevant, external and domestic developments since its inception imply that additional time is now required to meet our objectives. Our program for 2003 will aim to further advance the reform agenda to achieve these objectives.
All end-September quantitative performance criteria were met. We request a waiver for the nonobservance of October structural performance criterion related to the review of the budget, which has now been completed in consultation with the Fund, a waiver of applicability for the end-December quantitative performance criteria, and a waiver of nonobservance for the end-December 2001 structural performance criterion related to the BLBI arrangement. The latter has been postponed to end-March 2002 to provide more time to resolve this important and sensitive issue in a manner that is fully acceptable to all parties, including Parliament. On this basis, we request the completion of the fourth review. We also request a one-year extension of the Extended Arrangement and a rephasing of the remaining amount of access into nine equal purchases.
During the remaining period of the arrangement, we will continue to consult with the Fund on future economic policies and in order to assess progress under the program and reach understandings on any additional measures that may be needed to achieve its objectives. At the next review of the program, to be completed by March 2002, we will reassess the 2002 program in light of the outcome for this year and developments in the presently uncertain global environment, and identify additional structural benchmarks for the second half of 2002.
MEMORANDUM OF ECONOMIC AND FINANCIAL POLICIES
Government of Indonesia and Bank Indonesia
1. Since the political transition in July, the new government has been implementing a comprehensive strategy to reactivate the economy, restore investor confidence, and reduce poverty. Important steps in this direction have already been taken, including agreement with Parliament on a 2002 budget that represents a significant milestone on the road to restoring fiscal sustainability and freeing up public resources to address Indonesia's urgent social and development needs. The government has also underlined its commitment, including during the recent meeting of the Consultative Group for Indonesia (CGI) in Jakarta, to reinvigorate economic reforms and maintain close cooperation with the international community.
2. This is the second Memorandum of Economic and Financial Policies (MEFP) developed by the new government. It builds upon and extends the MEFP of August 27, 2001 by laying out the government's overall economic strategy and key policies and reforms planned for 2002, with particular focus on areas that are most relevant to strengthening macroeconomic performance and preserving financial stability. Along these lines, our strategy seeks to boost private sector activity and employment by stabilizing macroeconomic conditions, accelerating the return of assets to the private sector and resolution of assets under IBRA, deepening bank and legal reforms, and ensuring that fiscal decentralization proceeds smoothly.
3. The strategy for 2002 has been developed in the context of a significant deterioration in the global economic outlook. It also recognizes that much remains to be done to restore confidence among domestic and foreign investors. With these considerations in mind, the Government of Indonesia (GOI) has established a set of sequenced policy objectives for 2002 that is both ambitious and achievable. We believe that consistent implementation of the policy agenda set out below will lay the foundations for a return to strong and sustainable economic growth.
I. Macroeconomic Framework and Policies
4. Our macroeconomic policy objectives for 2002 are reflected in the assumptions underlying the 2002 budget approved by Parliament in October. This framework targets 3-4 percent growth and aims to bring inflation down to 9-10 percent by end 2002. We expect the external current account surplus to narrow further in 2002, as the external environment is likely to remain challenging in the near term. The effect of this narrowing on reserves should be cushioned by a partial reversal of private capital outflows, based on our commitment to sound economic management and improving the climate for investment. In addition, we are seeking further exceptional balance of payments support in 2002-03 to provide time for the effects of the reforms envisaged in this program to fully take hold.
5. The environment for implementing monetary policy during the past year and a half has been unusually difficult. Investor confidence has been weakened by a prolonged period of political instability and uncertainty over the direction of economic policies. More recently, events since September 11 have added a new complication. As a result, the exchange rate has come under downward pressure for significant periods, and base money has exceeded the indicative program targets. These factors, combined with the impact of upward adjustments in administered prices, have contributed to a marked increase in inflation since mid-2000. Higher nominal interest rates have been needed during this period to ensure an adequate level of real interest rates and maintain macroeconomic stability.
6. With political stability restored, and based on strong and consistent implementation of the policies outlined elsewhere in this memorandum, we expect the pressures on monetary policy to ease in 2002. In the short term, however, monetary policy will remain firmly geared to reversing the upward trend in inflation, thereby laying the foundation for a sustainable economic recovery. Our strategic goal is to restore single digit inflation by end 2002. Bank Indonesia (BI) will keep its monetary stance under review during the course of the year in line with this objective. BI has adopted a target path for gradually reducing base money growth from its recent rate of around 20 percent (12-month basis) to 12-14 percent by end-2002 which it believes is broadly consistent with the targeted reduction in inflation (Table 2). In addition, an important consideration in setting the monetary stance will continue to be the need to maintain adequate positive real interest rates. To contain pressures on monetary policy, the GOI will maintain its policy of zero recourse to bank financing of the budget.
7. The GOI is committed to a strong, independent and accountable central bank. In line with this objective, we are considering possible amendments to the central bank law that will preserve its independence while increasing its accountability. To this end, we sought last year the views of an independent panel of experts, and we support the panel's recommendations published in April 2001. The GOI intends to work in close consultation with Parliament, as well as with the IMF, to ensure that any revisions are mutually acceptable.
8. The sharp rise in the public debt following the 1997-98 crisis has limited the short-term flexibility of fiscal policy to support the economic recovery. It has also made urgent the task of mobilizing revenues by strengthening tax administration and reducing evasion and avoidance, curtailing poorly targeted subsidies relating in particular to the energy sector, and limiting the nonneutrality of fiscal decentralization. To reduce the public debt to sustainable levels, the government is pursuing a path of medium-term fiscal consolidation. Some progress was made towards this objective in 2001 and the 2002 budget represents an important further step in this regard.
9. The deficit for 2001 is expected to be in line with the budget target of 3.7 percent of GDP, helped significantly by the June fiscal package. However, the government was faced late in the year with a significant financing shortfall, mainly in the areas of privatization receipts and external program financing. The GOI has since taken measures to minimize this shortfall, notably through announcement of a major privatization (see paragraph 30), increasing cash transfers from IBRA, and intensifying efforts to implement the policy reforms needed to access available external funding. Nonetheless, some shortfall remains, and the GOI has made financial arrangements with other public sector entities to cover the remaining gap. These arrangements will be resolved or unwound in the course of 2002.
10. For 2002, the approved budget targets a sizable reduction in the deficit to 2½ percent of GDP. This reflects a balance between the priority of consolidating the government's debt position with the need to maintain adequate funding for high priority social spending. Key features include: (i) an increase of 1.2 percent of GDP in non-oil tax revenues; (ii) continued wage restraint in the public sector; (iii) lowering untargeted subsidies through planned increases in fuel and electricity prices; and (iv) capping the share of general allocation funds (DAU) to the regions at 25 percent of domestic revenue (net of shared revenue). The GOI recognizes that achievement of the targeted reduction in the deficit will require resolute actions on a number of fronts, and stands ready, in consultation with Parliament, to take prompt corrective actions during the year as needed to keep the budget on track.
11. To achieve the targeted improvement in non-oil revenues, the GOI plans to undertake four major initiatives to strengthen tax administration. First, a special "large taxpayer office" will be established to administer the relatively small number of taxpayers that collectively account for the largest proportion of revenue collection. This office will be operational by end-June 2002. Second, new systems and procedures will be introduced by July 2002 that will greatly reduce the time it takes for banks to notify the tax administration of the receipt of tax payments. Third, an annual plan will be formulated by March 2002 for conducting audits. Fourth, targets and performance measures will be set for collecting tax arrears. A detailed action plan for these measures is shown in Annex A. In the area of customs, the GOI will formulate a plan by June 2002 to improve procedures and strengthen administration.
12. The GOI views the phased elimination of poorly-targeted energy subsidies as a major part of its strategy to refocus spending on priority areas and achieve medium-term fiscal consolidation. Following a reduction of 0.8 percentage points of GDP in 2001, the GOI aims to reduce fuel subsidies by a further 2.8 percentage points to 1.8 percent of GDP in 2002. To achieve this objective, domestic fuel prices will be increased by an average of 30 percent by January 2002. For industrial and some non-industrial users, fuel prices will continue to be adjusted on a monthly basis in line with movements in international prices and the exchange rate. The GOI is exploring the possibility of applying a system of automatic adjustments for other non-industrial users not currently covered by such a system. The GOI will ensure that adequate mechanisms are in place ahead of the fuel price increase to compensate the poor; BPKP will complete its audit of the 2001 compensation scheme by end-March 2002. In addition to the above measures, Pertamina is taking steps to curtail fuel smuggling, aimed at reducing domestic fuel consumption to secure the savings envisaged in the 2002 budget, including through tightening controls on and monitoring deliveries to high-risk areas.
13. Domestic budget financing is targeted at 1.4 percent of GDP, comprising mainly IBRA asset recoveries and privatization receipts. Recognizing the importance of returning assets to the private sector, the GOI has agreed with Parliament on a higher target of 2.9 percent of GDP for total asset sales, with the balance to be used to reduce the domestic public debt. On this basis, the GOI is seeking net foreign financing of 1.1 percent of GDP, down from 1.4 percent in the 2001 budget. After scheduled amortization, this implies a gross external financing need of about $6½ billion, of which donor commitments at the recent CGI meeting amount to about $3.1 billion. The GOI is exploring prospects for closing the remaining gap with official creditors (see paragraph 21).
14. The GOI recognizes the importance of reaching the high case lending scenarios of the World Bank and AsDB to access funding pledged by the CGI, and is firmly committed to implementing the policy framework needed to achieve this. The GOI will not seek any commercial external financing for budgetary or extra-budgetary operations, except for some small amounts of suppliers and project-related credits.
15. The GOI is seeking to ensure that fiscal decentralization proceeds in an orderly fashion. The short-term safeguards put in place in 2001 have served this process well. These included, in particular, a ban on subnational government borrowing (except through the center); a contingency fund for local governments with funding shortfalls; regulations to ensure the continued payment of transferred personnel, and an agreement to base transfers in 2001 on the original budget estimates. By the end of 2001, the GOI will have completed the transfer of about 2 million employees to regions.
16. Nonetheless, considerable work remains to establish the necessary fiscal, legal, and administrative framework for successful decentralization. A priority will be to finalize and begin implementing the national framework to strengthen regional institutions and capacities under the auspices of the inter-agency decentralization coordinating team. In addition, the GOI is working to strengthen its oversight of regional regulations that have the potential to conflict with the national interest, especially in the areas of taxation and licensing, and restrictions on the free movement of goods, services, and capital. To date, the GOI has identified about one hundred regional regulations on taxes and levies that are inconsistent with the national tax base, and is consulting with the regions to ensure their reversal by June 2002.
17. The GOI has refined the DAU formula for FY 2002, in consultation with Parliament, with the aim of reducing mismatches between transferred revenue and expenditure and ensuring that the DAU is equalizing across regions. The formula will be modified on a temporary basis in 2002 to ensure that no region suffers a reduction in grant funding relative to 2001. New arrangements have also been put in place in Aceh and Papua in line with the special authorities granted to these regions.
18. The GOI recognizes that an effective reporting system for monitoring developments in regional government finances is essential to preserving macroeconomic stability and control. Some progress toward this objective was made in 2001, but the system is not yet fully in place. As a first step, the GOI is working towards producing an estimate of local government finances for the first quarter of 2001 by end-2001, and the full year outcome by end-June 2002. The 2002 regional budgets will be finalized and consolidated by end-June 2002. Our strategic aim is to produce quarterly reports on execution of the regional budgets within 6 months of the end of each quarter. Given the delays in this area, the GOI has issued a ministerial decree extending the moratorium on local government borrowing (except through the center) until end-2002. BPKP will complete its audits of allocations under the 2001 contingency fund by January 2002 and of central government lending operations to local governments by April 2002.
Public Debt Law
19. The GOI attaches high priority to developing a liquid and well-regulated market for domestic public debt to help facilitate the smooth handling of recapitalization bonds falling due in coming years. To this end, a draft Sovereign Debt Securities Law was submitted to Parliament in November that provides a comprehensive legal framework for public debt management and a liquid government securities market. The GOI will seek Parliament's support for early passage of the law, to enable treasury bill auctions to be initiated during the first quarter of 2002, slightly later than envisaged previously. In 2002, the proceeds of these issues will be used primarily to finance the amortization and repurchase of recapitalization bonds.
Balance of Payments and External Policies
20. We estimate that the external current account surplus narrowed significantly in 2001 to about $5 billion (3.4 percent of GDP), mainly on account of lower oil exports. A further narrowing is anticipated in 2002, as exports are likely to remain weak owing to the difficult global outlook, while some pickup in imports is projected with a strengthening in domestic activity. We expect net private capital outflows to slow in 2002, reflecting the more stable political backdrop and our commitment to improve policy implementation, including accelerating asset sales. The program is also based on a moderate accumulation of external reserves sufficient to maintain coverage at about 6 months of imports.
21. Based on this outlook, Indonesia continues to have a need for exceptional balance of payments financing. The donor pledges at the recent CGI meeting will help to close this gap, and we have also been in touch with the Group of Official Creditor Countries of Indonesia (Paris Club) to discuss prospects for a further rescheduling to lower interest and principal payments falling due during the 21-month period through December 2003. We will seek similar understandings with our non-Paris Club official bilateral creditors. We are optimistic that the remaining amount of financing should be available from these sources during 2002.
22. We remain firmly committed to the exchange system underlying the financial program--the floating exchange rate regime and preservation of Indonesia's historically free capital account--as enshrined in the law on foreign exchange management enacted in 1999. In line with this commitment, BI does not plan to implement any new restrictions on capital flows. The GOI is also committed to maintaining a liberal trade regime.
II. Financial Sector Reforms
23. In the wake of the crisis, the market share of government-controlled banks has increased to about 70 percent of the system, compared with 40 percent before the crisis. A key plank of the government's bank reform strategy is to reverse this increase and restore a strong private sector-led banking system. We are also committed to further strengthening the supervisory and regulatory framework, and to further consolidation of the banking sector. The near-term policy agenda was set out in the August 2001 MEFP, though some adjustments have been made in light of delays associated with the political transition.
State Bank Restructuring
24. With respect to state banks, the initial primary share issue for 30 percent of Bank Mandiri will be launched in the first quarter of 2002, and concluded in the second quarter. The strategy for the other state banks is under preparation, and will be finalized in consultation with Parliament in the first quarter of 2002. The GOI is working to develop recommendations by June 2002 on the timing and strategy for divestiture of BNI and BRI. The future of Bank BTN will be assessed by end-March 2002 based on the findings of an independent study. As an important safeguard, the state bank monitoring unit will continue to closely monitor the state banks with a view to advancing risk management, avoiding directed lending, and ensuring progress toward privatization.
Bank Supervision and Regulation
25. Developing strong and effective bank supervision remains key to the GOI's strategy of maintaining financial sector stability. As an important milestone, BI has issued revised regulations raising the minimum capital adequacy requirement to 8 percent on January 1, 2002. In anticipation of this increase in the CAR, many banks have succeeded in strengthening their capital positions. Banks that cannot meet the new requirements within specified periods will be transferred to IBRA for resolution. BI will implement risk-focused examinations and supervisions of all systemically important and high risk banks in 2002, and will complete during 2002 all the specific actions in its master plan aimed at improving compliance with the Basel Core Principles for Effective Banking Supervision, including moving toward consolidated supervision. To enhance transparency and market discipline, BI will begin monthly publication of key individual bank financial data beginning with the end-December 2001 reporting period.
26. To help facilitate a final resolution of the long-outstanding issues between the MOF, IBRA, and BI related to the BLBI liquidity credits, the GOI has decided to seek independent advice from a person of high international standing on a fair and equitable means of addressing this issue and on the broader question of financial relations between the GOI and the central bank. The GOI and BI are committed to resolving this issue by no later than March 2002. BI is taking all necessary steps to complete by end-2001 all outstanding issues related to its 1999-00 audits, especially the divestment of its subsidiaries.
27. The GOI intends to set by end 2001 a realistic timetable for the establishment of the Financial Sector Supervisory Institution (FSSI). A steering committee has been established to direct important policy decisions on the FSSI. These will include the scope of financial system supervision, the governance and funding of the new agency, and the timing of submission to Parliament of the draft FSSI law and other relevant legislative amendments. In the interim, the Ministry of Finance with assistance of the AsDB is implementing steps to undertake financial reviews for selected insurance companies. A separate steering committee has been set up to make recommendations regarding the design of a deposit insurance scheme, and its institutional arrangements, that will eventually replace the current blanket deposit guarantee. The work of the two committees will be coordinated to address the legal framework for dealing with problem banks and the relationship between the FSSI and the agency responsible for deposit insurance.
28. The GOI recognizes that prompt action to resolve problem banks is essential to preserve financial stability, minimize the fiscal cost, and provide appropriate incentives for sound bank management. Resolutions have been arranged during 2001 for two private banks--Unibank and Bank Internasional Indonesia (BII)--that encountered solvency problems. Unibank was transferred to IBRA in late October for payout of its deposit accounts. For BII, the GOI has decided resolve the situation by taking several steps including to address the remaining inter-bank claims and deferred tax credits and to dilute the position of the original shareholders using recycled bonds rather than to proceed with the previous planned sale to Bank Mandiri.
III. Privatization, Asset Recovery and Debt Restructuring
29. Privatization of state-owned enterprises (SOEs) is a key part of the GOI's broader reform effort aimed at improving economic performance and strengthening the public finances. This reflects concerns that the SOEs have frequently been inefficient providers of goods and services, a drain on the public finances, and exploited for the benefit of individuals and special interest groups. Given their large size in the economy, the weak performance of the SOEs has acted as a major drag on Indonesia's overall economic performance. To address these concerns, the GOI has reestablished the Ministry of State-Owned Enterprises to lead its reform and privatization efforts.
30. The immediate priority has been to reactivate the privatization program, an area where essentially no progress has been made in the last two years. Given the short time available to meet the 2001 privatization target following the political transition, the GOI has focused its efforts on a few key enterprises. Specifically, the GOI has completed a major sale in order to achieve privatization receipts of Rp 3.5 trillion. For 2002, the GOI is preparing a program designed to at least achieve the budget target for privatization receipts of Rp 6.5 trillion. This program will focus on the list of companies presented in the context of the 2002 State budget discussions with Parliament. To sustain the momentum of the program, the GOI plans to complete further sales in the first half of 2002 with the aim of achieving about half of its Rp 6.5 trillion target by mid-year.
IBRA Asset Recovery and Restructuring
31. The role and performance of IBRA remain crucial to fiscal sustainability, returning productive assets to the private sector, and increasing investor confidence. While some progress has been made in accelerating asset recoveries during the past two years, the GOI believes that considerable scope remains for strengthening IBRA's performance. To this end, the GOI has transferred responsibility for IBRA to the Ministry of State-Owned Enterprises, thereby consolidating responsibility for all official asset sales within a single ministry.
32. During 2002, IBRA is targeting a significant acceleration of its net cash recoveries to Rp 35 trillion, up from the target of Rp 27 trillion for 2001. A further Rp 7.5 trillion will be recovered through the sale of loan assets for recapitalization bonds. IBRA will publish an agreed schedule of quarterly asset recovery targets consistent with this objective by early 2002, prior to the fifth review under the program.
33. The GOI remains committed to strengthening IBRA governance and improving transparency. All IBRA asset sales will continue to take place through public auctions or other transparent and competitive bidding mechanisms. Large debt restructurings undertaken by IBRA will continue to be governed by the principles published by the FSPC in April 2001, which also constrain IBRA from extending future guarantees. The Oversight Committee (OC) has completed its reviews of 34 large borrower restructurings for IBRA's top 21 obligors--the FSPC has published the results of the reviews of 23 of these restructurings as well as its responses, and the results of the remaining reviews are expected to be published in the coming weeks. To avoid undue delays in the restructuring process, IBRA will promptly submit to the OC for its independent review all new large restructuring proposals before they are submitted to the FSPC; IBRA has submitted 22 new restructurings at the MOU or earlier stage for OC review, which will be completed by end-March 2002. The FSPC will ensure that the OC continues to be provided with a sufficient budget for conducting this important function, assisted as needed by independent professionals.
34. IBRA intends to take more decisive action against noncooperating debtors. Over Rp 50 trillion in loans are currently in litigation. To date, IBRA has filed legal actions against 49 noncooperating debtors of the top 21 obligors, with total debts of over Rp 13 trillion. In future, IBRA envisages more regular use of its PP17 powers, so as to accelerate asset recoveries. A specific plan to address issues associated with noncooperating debtors will be finalized by end-March 2002.
35. IBRA is working to further strengthen its corporate governance and internal controls and to improve the transparency of its financial statements. Specific measures include: (i) the appointment of a Chief Financial Officer, who has been given overall responsibility for the implementation of improved internal controls; (ii) engagement of a new accounting firm to prepare the 2001 annual audit; and (iii) establishment of a new, high-level internal team to prepare a revised Corrective Action Plan (CAP) to address deficiencies identified from IBRA's year 2000 annual audit. Many of the deficiencies carry over from the 1999 audit, and some (e.g., resolution of BLBI, the temporary equity investments in banks, etc) are outside the control of IBRA. The Ministries of Finance and State-Owned Enterprises are committed to resolve these external issues by end March 2002. For its part, IBRA's new CAP team has redoubled its efforts to address by end-2001 the audit exceptions within its control, especially on the resolution of numerous data discrepancies. Moreover, in response to the new BPKP audit report on internal controls, IBRA has appointed a coordinator to prepare a parallel action plan that will be integrated into the annual audit CAP process.
Asset Management Credits (AMC) Operations
36. For 2002, AMC's target for cash recoveries has been set at Rp 24 trillion, of which Rp 16 trillion will come from core asset sales, and the balance from noncore asset sales, collections, settlement, and litigation proceeds. To meet this target, IBRA plans to sell its existing stock of restructured loans as well as its outsourced commercial and remaining retail and SME loans during the first half of 2002. In addition, IBRA plans to begin selling unrestructured and commercial corporate loans through either market-based auctions or other transparent and competitive bidding mechanisms, including but not limited to joint ventures and securitization. Financial and legal advisers to help launch all these sales will be appointed by end-February 2002.
37. For IBRA's largest debtors, most restructurings have reached the MOU stage, and IBRA remains committed to reaching legal closure on them in 2002 after their independent OC review and any revisions agreed by the FSPC in light of the findings of the review. A comprehensive strategy for disposing of these loans will be finalized by March 2002. A key safeguard for ensuring good governance will continue to be FSPC approval for all large loan sales. Also, any use of recapitalization bonds as a means of payment in loan sales will be governed by guidelines to be published by end-December, which seek to ensure that both the sale and the valuation of bonds tendered in these sales are conducted in a transparent and market-based manner.
Asset Management Investments (AMI) Operations
38. After projected asset sales during 2001, AMI will be left with a stock of shareholder assets valued at roughly Rp 11.4 trillion. The target for recoveries in 2002 is Rp 8.4 trillion, which will be reached primarily through further asset sales under the 29 existing agreements with former bank owners, as well as payments received as part of the shareholder settlements. To ensure that pledged assets can be sold, IBRA is giving high priority to resolving the shareholder settlements currently under dispute. To this end, IBRA plans to review the existing 25 agreements that are in dispute to develop and implement a resolution strategy based on commercial principles by March 2002. This effort will be managed in conjunction with the Attorney General's office while ensuring a coordinated and firm response toward noncooperating shareholders.
Bank Restructuring Unit (BRU) Operations
39. IBRA is committed to making tangible progress toward divesting its holdings of banks in 2002. The successful sale of a 51 percent stake in bank BCA to a strategic partner represents the first major step in this process. The next priority is the sale of a majority stake in bank Niaga, which is expected to be completed by mid-2002. Total receipts from BRU in 2002 are targeted at Rp 4.3 trillion.
40. Our strategic aim remains for IBRA to dispose of its entire equity stakes in its banks by 2003. To advance this goal, a comprehensive divestment plan will be presented for Parliamentary approval by March 2002. In preparation for sale, the GOI is making arrangements to allow some banks to swap part of their fixed rate bond holdings for variable rate bonds. BRU and MOF will seek the necessary remaining parliamentary approvals to ensure that these swaps are completed in early 2002. To promote compliance of IBRA's banks with the strengthened capital adequacy requirement, IBRA has announced plans to merge five smaller banks.
Jakarta Initiative Task Force (JITF)
41. Despite delays earlier this year due to the uncertain exchange rate environment, the JITF is on track to accomplish its strategic objective for debt restructurings in 2001. By end-November, the cumulative total for JITF-mediated debt for which a term sheet or MOU had been signed rose to about $12.7 billion, representing the debt of 63 companies. By end-December, the total is expected to rise to $14 billion, in line with the targets under the program. JITF-mediated transactions are also moving to legal closure at an accelerated pace, since deadlines for final restructuring agreements were incorporated into the JITF mediation schedules. As of November, final restructuring agreements had been signed for debt of $7 billion, representing the debt of 44 companies. In 2002, JITF expects to restructure debt (MOU stage) of a further $4-5 billion (subject to the additional FSPC referrals referred to below) and bring debt restructurings of an additional $2-3 billion to legal closure.
42. At end-November, the JITF's caseload for unrestructured cases consisted of 58 companies with a total debt of $8.7 billion. The GOI remains committed to referring strategically important cases to the JITF, including companies to which the state banks have significant exposure. By end-December, the FSPC will have referred additional companies to JITF with an aggregate debt of $2 billion, bringing the cumulative total for FSPC referrals to $10 billion in debt, in line with program targets for 2001. We will formulate our target for additional FSPC referrals in 2002 by end-March. Consistent with the existing FSPC decree, IBRA will continue to participate in JITF-led negotiations on a single-debtor basis, and will agree to restructuring terms accepted by the majority of creditors in cases where IBRA is a minority creditor. Beyond expediting the resolution of cases, the JITF has begun to examine more closely the quality of its restructurings, and to urge parties to agree to deals that ensure long-term debt sustainability.
43. The GOI continues to promote a regulatory environment that is supportive of corporate restructuring. Before end-December, the Tax Office will complete issuance of decrees with respect to eligible debt restructuring transactions of all parties in JITF-led mediation that had received an FSPC tax recommendation as of November 30, 2001. For new cases, the Tax Office decree will be issued within a maximum of one month of the date of the FSPC's tax recommendation. More generally, the Tax Office will ensure that companies in JITF deals that issue equity in exchange for debt will not recognize income for tax purposes and will otherwise be entitled to tax neutral treatment on the transaction regardless of applicable accounting regulations or standards. The GOI also remains firmly committed to imposing sanctions against parties that refuse to cooperate in JITF-led mediations, including referral to the Attorney-General for bankruptcy proceedings.
IV. Legal Reform, Governance, and Other Structural Reforms
44. Experience has demonstrated the importance of legal and judicial reforms to progress with the broader agenda set out in this document, including restoring investor confidence, deepening bank reforms, and asset recovery. Accordingly, the GOI has decided to give high priority to achieving greater progress in this area.
45. The immediate priority is to implement strong measures to address court system and government governance problems. As a first step in this regard, we intend to establish the Anti-Corruption Commission (ACC) no later than the second quarter of 2002. To this end, it is expected that Parliament will adopt the final package of legislation necessary for establishment of the ACC in January 2002. It is intended that stringent criteria will be established to ensure that only persons who meet strict professional qualification requirements and whose integrity is beyond reproach will be appointed to the commission.
46. The ACC will have responsibility for the investigation and prosecution of corruption cases. It will also be tasked with preparing recommendations for the government on key elements of the anti-corruption strategy. These include in particular: (i) the establishment of a separate and independent Anti-Corruption Court; (ii) expanded penalties for persons convicted of corruption; and (iii) strengthened incentives, including statutory immunity, for persons that cooperate in corruption investigations. The ACC will be asked to submit its recommendations in these areas to the government by the third quarter of 2002. The Coordinating Minister for Political and Security Affairs, who has responsibility to coordinate the implementation of the government's anti-corruption strategy, will lend high-level political support to the ACC and take steps to ensure that the ACC is able to operate effectively immediately after its establishment.
47. Legal reforms are proceeding in other areas. After some delay, draft amendments to clarify and strengthen court implementation of the bankruptcy law are to be submitted to Parliament shortly with the expectation that they will be adopted by early 2002. The work of the Independent Commission for the Audit of the Wealth of State Officials has begun, and a government regulation was issued in November to provide regular salary payments for members of the commission. A regulation on compensation of ad hoc judges will be issued in early 2002. In 2002, increasing attention will be paid to the work on a range of longer-term legal and judicial reforms, and implementation of the reforms identified in the recent blueprint for reform of the Commercial Court.
Public Sector Governance
48. Public sector governance has been carried forward in several key areas of the program:
49. For 2002, the GOI's efforts will focus mainly on initiatives already in place. In particular, efforts will be intensified to audit the remaining off-budget funds and to impose sanctions: the special audits by BPKP of the off-budget funds not reported last year will be completed by end-2001, and their bank accounts will be consolidated and remaining funds brought under central government control in the first quarter of 2002; the BPKP audit of the Reforestation Fund will be completed by end-2001, with corrective actions adopted by March 2002; and the BPKP audits of the two Investment Funds and the adoption of corrective actions will both be completed by June 2002.
50. The audit of key government agencies and adoption of corrective actions will proceed broadly as envisaged in earlier MEFPs:
51. The GOI is also moving ahead with important initiatives to improve public financial management and procurement systems. Draft laws on state finances, treasury, and audits have been submitted to Parliament. A working committee consisting of members representing Parliament and the GOI will be appointed in accordance with parliamentary procedures to finalize these laws. This will be based on principles incorporated in a white paper to be prepared by the GOI, in consultation with the World Bank, reflecting the key principles of a modern public financial management system. The revised laws will be ready for enactment by May 2002, following which implementing regulations will be put in place in time for implementation in 2003.
Other Structural Reforms
52. The World Bank and AsDB are taking the lead on sectoral policies. The GOI will continue to work closely with both institutions to pursue structural reforms and sectoral policies aimed at strengthening medium-term growth and delivering high case lending scenarios. Key policy areas in this regard include rice policies, state-owned enterprise reform, natural resource management, civil service reform and poverty reduction.
V. Economic Program for 2003
53. Our economic program for 2003 will aim to further advance the reform agenda to ensure external viability by the end of the arrangement. A key component of our program will involve further fiscal consolidation aimed at bringing down the government debt burden rapidly over the medium term. Monetary policy will continue to be geared to reducing inflation within the context of a floating exchange rate arrangement. On the structural front, we will continue to pursue reforms in the core areas of asset recovery and privatization; reducing the role of the public sector in the banking sector while ensuring that strong prudential and supervisory systems are in place to safeguard the public interest; and deepening legal and judicial reforms. The quarterly reviews envisaged under the 2002 program will provide regular opportunities to review progress and to gradually flesh out specific policies and measures in all of these areas for 2003 in close consultation with the Fund, the World Bank, and AsDB.
Indonesia: Milestones for Tax Administration Initiatives, 2001-02
Key milestones for implementing the tax administration initiatives are set out below. The main features of these initiatives, along with preliminary implementation plans and timetables, are fully documented in the report of the November 2001 IMF technical assistance mission.
January 2002, Ministerial Decree issued creating a Regional Office for Large Taxpayers at the headquarters of the Directorate General Tax and five Large Taxpayer Offices in areas of major economic activity, beginning with one or two offices in Jakarta.
January 2002, Minister of Finance issues instructions on new systems and procedures for filing tax returns and processing tax payments at the Large Taxpayer Offices.
February 2002, Directorate General of Taxation formulates a governance framework for the Large Taxpayer Office, including a code of conduct, enhanced oversight by an internal audit unit, a "hotline" for taxpayers to report illicit behavior by tax officers, and streamlined procedures for sanctioning tax officers found to violate code of conduct.
March 2002, Directorate General of Taxation formulates a national audit plan and reporting system setting targets for the number and types of audits to be conducted with view towards auditing 15 percent of large and medium-sized enterprises in 2002. Audit selection will be performed on quarterly basis using risk-based system; reporting of audit results will take place on a monthly basis.
March 2002, Directorate General of Taxation formulates a national arrears collection plan and reporting system that will reduce the accumulated stock of arrears owed by the largest 1,000 debtors by 25 percent by end 2002. Reporting of arrears collection results will take place on monthly basis.
June 2002, Large Taxpayer Region and one or two Large Taxpayer Office(s) in Jakarta commence operations.
July 2002, new tax filing and payment systems implemented at Large Taxpayer Office(s).
December 2002, Director General of Taxation submits status report to Minister of Finance on four tax administration initiatives.
December 13, 2001
A. Monetary Targets
1. Performance Criterion on Net Domestic Assets
Net domestic assets (NDA) of BI are defined as the difference between base money and net international reserves (NIR) of BI as defined in Section D, converted into rupiah at an accounting exchange rate of Rp 7,000 per U.S. dollar. Base money is defined as currency in circulation, bank deposits at BI in rupiah, private sector demand deposits at BI, and the aggregate reserve deficiency. The aggregate reserve deficiency is defined as the amount by which aggregate statutory reserves against rupiah third-party liabilities exceed bank deposits at BI.
The NDA targets will be subject to the following adjustors:
(i) In the event of shortfalls of balance of payments support from that assumed in Section E, the ceiling on NDA will be adjusted upward by the rupiah equivalent of the shortfall, up to a maximum of US$1.0 billion.1 The ceiling on NDA will be adjusted downward by the rupiah equivalent of any excess of balance of payments support over that set out in Section E.
(ii) Changes in reserve requirements will modify the NDA ceiling according to the formula:
where denotes the change in the ceiling on NDA of BI; r0 denotes the reserve requirement prior to any change; B0 denotes the rupiah reservable base in the period prior to any change; is the change in the reserve requirement ratio; and denotes the immediate change in the rupiah reservable base as a result of changes in its definition.
2. Indicative Targets on Base Money
The indicative target on base money at the test date will be measured as the average of its value from the first business day after the fifteenth day of the month up to (and including) the fifteenth day of the following month (or the last business day preceding the sixteenth day, if the fifteenth day is not a business day). The target on base money will also be adjusted by changes in reserve requirements according to the same adjustor applied to NDA in the previous section.
B. Fiscal Targets
1. Performance Criterion on the Overall Central Government Balance (Financing Side)
For the purposes of the program, all interest payable, including the interest costs associated with bonds and other debt issued by the government to cover the costs of bank restructuring will be placed above the line. The fiscal balance is therefore defined as the negative of the sum of: (i) net foreign borrowing; (ii) the change in net credit to the central government from the banking system, excluding the amount of government bonds, and excluding changes in the balances on the Haj account and the deposit guarantee accounts (accounts 502 and 519); (iii) the change in the stock of government bonds (excluding new issues of bonds to cover the cost of bank restructuring); and (iv) net financing from all other sources to the government, including receipts from privatization and divestiture.
Net foreign financing is defined as government foreign borrowing less amortization payments (including debt prepayments) of foreign debt, with transactions converted into rupiah each month at the average exchange rates for that month. Net credit from the banking system is defined as the change in net credit to government (commercial loans and the extrabudgetary funds), as reported in the central government accounts in the monetary survey. Net financing from all other sources includes receipts from the sale of government assets and recoveries of assets held by IBRA, including any sale or swap of IBRA (or other government) assets for government securities.
Monthly changes in government foreign currency balances will be converted into rupiah at the average exchange rate (based on the rates reported to IFS) prevailing for that month.
C. IBRA Asset Recovery
The target for IBRA's net cash recovery is defined as the sum of all cash receipts stemming from transactions related to IBRA assets (including but not limited to the sale of assets, debt service on loans, dividend payments, and shareholder settlement payments) minus IBRA operating expenses.
D. External Sector Targets
1. Performance Criterion on Net International Reserves of Bank Indonesia
For monitoring purposes, net international reserves of BI (NIR) are defined as (i) + (ii) – (iii):
(i) the U.S. dollar value of gross foreign exchange assets in foreign currencies minus gross liabilities in foreign currencies; (ii) the net forward position of BI; and (iii) reserves against foreign currency deposits.
NIR is based on the SDDS concept of gross reserves. Accordingly, foreign exchange assets are defined as those assets that are in convertible currencies, are under the direct effective control of BI, and are readily available for such purposes of BI as intervention or the direct financing of payment imbalances. Such assets may be in any of the following forms, provided that they meet the test of effective control and ready availability for use: currency, bank deposits in nonresident institutions and government securities, and other bonds and notes issued by nonresidents (with a rating not below "A" in the classification of Fitch IBCA and Standard and Poor's or "A2" in the classification of Moody's). In addition, holdings of SDRs and of monetary gold are included (provided that they too meet the test of effective control and ready availability for use), as is the reserve position in the IMF.
Excluded from the definition of gross foreign exchange assets are all foreign currency claims arising from off-balance sheet transactions, claims on residents, capital subscriptions in international financial institutions, any assets in nonconvertible currencies, claims on any nonresident Indonesian-owned institutions, or any amounts (in all components of assets, including gold) that have been pledged in a direct or contingent way.
Gross foreign liabilities are all foreign currency-denominated liabilities of contracted maturity up to and including one year plus the use of Fund credit. Foreign currency liabilities to the central government are excluded. All assets and liabilities will be valued using the exchange rates and gold price shown in Section E.
The net forward position is defined as the difference between the face value of foreign currency-denominated BI off-balance sheet claims on nonresidents (forwards, swaps, options, and any futures market contracts) and foreign currency obligations to both residents and nonresidents.
The NIR floors will be subject to the following adjustors:
(i) In the event of shortfalls of balance of payments support from those assumed in Section E, the NIR floor will be adjusted downward by the amount of the shortfall, up to a maximum of US$1.0 billion. The NIR floor will be adjusted upward by the amount of any excess of balance of payments support over that set out in Section E.
The adjustors and definition of NIR will be subject to review to take account of new sources of financing not anticipated under the program.
2. Performance Criterion on Contracting or Guaranteeing
of New External Debt
The limit applies to the contracting or guaranteeing by the nonfinancial public sector of new nonconcessional external debt2 with an original maturity of more than one year, which is defined as loans containing a grant element of less than 35 percent on the basis of currency-specific discount rates based on the OECD commercial interest reference rates.3 Excluded from the limits are credits extended by the IMF and balance of payments support loans, extended by multilateral and bilateral creditors. Debt falling within the limit shall be valued in U.S. dollars at the exchange rate prevailing at the time the contract is entered into, or guarantee is issued.
3. Performance Criterion on Contracting or Guaranteeing Debt to Commercial Creditors
The limit applies to the contracting or guaranteeing by the central government or Bank Indonesia of new debt to commercial creditors. Excluded from this limit are export credits extended or guaranteed by official creditors.
4. Performance Criterion on the Stock of Short-Term Debt Outstanding
The limits apply to the stock of debt of maturity of original maturity of one year or less, contracted or guaranteed by the nonfinancial public sector. Excluded are normal import-related credits, reserve liabilities of Bank Indonesia, forward contracts, swaps, and other futures market contracts.
5. The non-accumulation of public external arrears during the program period is a performance criterion and will apply on a continuous basis. The program contains a continuous performance criterion that there will be no securitization or forward sales of receipts from natural resources.
E. Program Assumptions and Reporting
1. Program Baselines for Balance of Payments Financing Package
2. Exchange Rates and Gold Price to be Used Under the Program1
Monitoring the program will require accurate and timely data. All information on performance criteria, indicative targets, and balance of payments support loans will be reported to Fund staff within one week of the reference date. In addition, detailed data on government revenues and expenditures, costs of financial sector restructuring, and the monetary survey will be provided monthly within 22 days of the reference date. Monetary statistics covering developments in the banking system, including third-party liabilities, monetary accounts, and deposit and lending rates will be provided weekly (with a 12-day lag). Data on base money (showing all the factors affecting reserve money), foreign exchange intervention in both the spot and forward markets, as well as use of reserves for financing and liquidity support will be provided daily (with a 2-day lag). The net forward position, net foreign assets, liquidity support to banks under various facilities, and open market operations (including the stocks of SBIs and SBPUs) will be provided daily (with a 2-day lag). Information on access by individual banks and nonbanks to BI credit (either in rupiah or foreign currency) will be provided on request. Debt stocks and associated flows broken down by both creditor and debtor types and maturity will be provided on a quarterly basis.
BI will publish weekly, with 3-day lag, key monetary data, (which may be subject to revision) including base money, gross international reserves of BI, NDA of BI, and NIR of BI (the information could be made available through special press releases and/or by updating BI's web site).
Within three weeks of the end of each month, IBRA will provide to Fund staff its financial results of the most recent month and of the year-to-date, as prepared by its Finance and Accounting Division. These data will be broken down as follows: (i) AMC (receipts from loan work out, outsourcing, core asset sales, noncore assets, and litigation); (ii) AMI (receipts detailed by individual asset sales and/or dividends); (iii) BRU (receipts detailed by individual asset sales and/or dividends); (iv) other income (receipts detailed by investment income, guarantee premia, and other); and (v) operating expenses.
1Converted at the accounting exchange rate of Rp 7,000 per U.S. dollar.
2The term "debt" has the meaning set forth in point number 9 of the Guidelines on Performance Criteria with respect to Foreign Debt (Decision No. 12274-00/85, August 24, 2000).
3For loans with a maturity of at least 15 years, the 10-year average commercial interest reference rates (CIRRs) published by the OECD should be used as the discount rate for assessing the level of concessionality, while the 6-month average CIRRs should be used for the loans with shorter maturities. To both the 10-year and the 6-month averages, the following margins for differing repayment periods should be added: 0.75 percent to repayment periods of less that 15 years; 1 percent for 15-19 years; 1.15 percent for 20-29 years; and 1.25 percent for 30 years or more.