Indonesia and the IMF

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Indonesia—Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding

Jakarta, Indonesia, March 18, 2003

The following item is a Letter of Intent of the government of Indonesia, which describes the policies that Indonesia intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Indonesia, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

We have continued to make progress in implementing our economic program, with increasing signs that our efforts are laying the basis for a durable recovery. Over the past year, the rupiah has strengthened, interest rates have fallen along with inflation, and our balance of payments position has improved with a further build-up in international reserves. Notwithstanding the tragic events in Bali last October, economic growth has been sustained. These positive developments were facilitated by a cautious monetary policy and continued fiscal consolidation, as well as further advances in structural reforms.

Our program for 2003 aims to strengthen growth and employment prospects by enhancing competitiveness and fostering a more attractive investment climate. As described in the attached Memorandum of Economic Policies (MEFP), our strategy rests on the continuation of prudent fiscal and monetary policies, with an emphasis on sound debt management in support of fiscal sustainability, and the vigorous implementation of the structural reform agenda.

With respect to the monitoring of the 2002 program, we are pleased to report that all end-December quantitative performance criteria were met, and that good progress was made against the structural benchmarks for November and December. We request a waiver for the nonobservance of the end-December structural performance criterion concerning financial issues related to the BLBI, whose implementation awaits completion of ongoing parliamentary consultations. In view of our performance under the program, we request completion of the eighth review under the Extended Arrangement.

We will continue to consult with the Fund on economic policies during the remaining period of the arrangement. The next review of the program is to be completed by June 2003, at which time we will reassess the 2003 program in light of developments in the first quarter, in particular budget prospects and tax and spending policies, and will identify additional structural benchmarks for the second half of 2003, as needed, to ensure that the objectives of the program are achieved.

Sincerely yours,

Dorodjatun Kuntjoro-Jakti
Coordinating Minister for
Economic Affairs
Minister of Finance
Syahril Sabirin
Bank Indonesia


Memorandum of Economic and Financial Policies
Government of Indonesia and Bank Indonesia

1. We have made significant progress over the past year in implementing our economic program. Despite the setback from the tragic events in Bali last October, the economic recovery continues and macroeconomic stability has been maintained. Economic growth in 2002 was positive for the fourth consecutive year, and real GDP has now recovered to its pre-crisis level. At the same time, the balance of payments has strengthened, with a further build-up in international reserves.

2. These positive developments were facilitated through sound macroeconomic management and further advances in structural reforms. The fiscal deficit outturn was well within the government's 2002 budget target, contributing to a reduction in public debt. Important strides were also made in improving tax administration and debt management. Bank Indonesia's (BI's) prudent monetary policy stance led to a decline in inflation which, together with the rupiah's stability, allowed interest rates to decline in support of the recovery. In the financial sector, bank divestment gained momentum with the sale of two banks taken over during the crisis and the launching of the sale of a third. IBRA asset recoveries and privatization receipts exceeded expectations. In the legal sphere, the Anti-Corruption Commission (ACC) was established.

3. This Memorandum of Economic and Financial Policies (MEFP) lays out our economic strategy for 2003, the final year of the Extended Fund Facility (EFF) launched in January 2000. While much has been achieved under the EFF, strengthening growth and employment prospects by enhancing business competitiveness and fostering a more attractive investment climate remains a key challenge. Our strategy for 2003 rests on the vigorous implementation of the reform agenda, with special emphasis on increasing non-oil exports and investment, sound debt management in support of fiscal sustainability, and the rehabilitation and development of vital infrastructure. Against this background, our program for 2003 is framed around the following objectives:

  • consolidation of recent gains on the macroeconomic front through the continued implementation of prudent fiscal and monetary policies;

  • enhancement of financial system stability by further strengthening the banking system, state bank governance, and the regulatory framework; and

  • improvement of the investment climate through legal and other structural reforms.

4. In addition to the policies outlined in this memorandum, we will continue our efforts in other areas, including rice policies, state-owned enterprise reform, natural resource management, civil service reform, and poverty reduction.

I. Macroeconomic Framework and Policies

5. The basic macroeconomic objectives for 2003 are as reflected in the assumptions for the budget approved by Parliament in November 2002. The framework targets GDP growth of 4 percent, and aims to reduce inflation to 9 percent by year-end (Table 1).

Monetary Policy

6. Monetary policy will be geared toward maintaining a downward trend in inflation and preserving broad exchange rate stability. Consistent with this, and the need to support the economic recovery, BI has designed a monetary program around a target range for base money growth of 13-14 percent for end-2003. We will review the monetary stance throughout the year to ensure that monetary policy remains consistent with the program's inflation objective.

Fiscal Policy

7. The government is firmly committed to further fiscal consolidation to reduce public debt to more manageable levels, while maintaining spending on infrastructure and boosting the provision of key social services. In 2003, we are targeting a budget deficit of 1.8 percent of GDP, as approved by Parliament in November. We are aiming for a significant increase in non-oil tax revenues and higher outlays on priority social and development programs. In January, we also adopted a package of tax measures to further stimulate economic activity, that comprised a reduction in luxury taxes on consumer goods, interim relief from the VAT for businesses, and an elimination of income taxes for minimum wage workers.

8. The strategy to mobilize non-oil tax revenues centers on a continuation of tax administration reforms initiated in 2002. In this connection, the initial operations of the Large Tax Payer Offices (LTOs), now under way since last September, have been promising. We will expand operations of the LTO in Jakarta to more taxpayers while we evaluate an expansion to other regions at a future date. The new electronic payment system will be extended nationwide in 2003. In addition, we plan to expand the coverage of corporate tax audits, intensify the collection of arrears, enhance control of nonfiling taxpayers, and take steps to increase the taxpayer population. The governance framework of Directorate General of Taxation (DGT) will also be strengthened and extended to all tax offices nationwide in 2003. The action plan for 2003 is shown in Annex A; a medium-term reform plan is also under preparation. We have also initiated a comprehensive strategy to reform customs administration, focusing on strengthening governance, facilitating trade, and combating smuggling and tax evasion. Detailed plans for the 2003 reform agenda will be ready for implementation by June.

9. Our aim remains to further reduce fuel subsidies, which are not well-suited to helping the poor, and to shift our assistance to more targeted schemes. The approved budget for 2003 had planned for the elimination of fuel subsidies with the exception of those on kerosene consumed by households. However, in view of the spike in international oil prices resulting from the prevailing abnormal world market conditions, the government has decided to smooth the adjustment of domestic fuel prices and temporarily restore some subsidies until market conditions stabilize. Our deficit target for 2003, as well as spending in priority areas, will not be affected. At the same time, we have expanded programs to improve the welfare of low-income groups, and are examining ways to improve their targeting on the poor.

10. To enhance the efficient use of public funds, the government intends to take a number of steps to strengthen expenditure management. The initial focus will be on strengthening the treasury and budget functions of the Ministry of Finance. A blueprint for this reform, along with the timetable for its implementation, is expected to be finalized in April. Once the blueprint is in place, the government intends to establish dedicated task forces by July to review the reform of the government's payment and receipts system, consolidation of bank accounts, and the restructuring of budget preparation procedures.

Financing and Debt Management

11. With regard to financing of the budget, we expect domestic sources, consisting of receipts from IBRA asset sales and privatization, to provide 1.4 percent of GDP. This leaves a net external financing need of 0.4 percent of GDP to be met by commitments from official creditors received at the recent meeting of the CGI, from Paris Club rescheduling, and by other official loans.

12. Our public debt management strategy aims to lower the budget's debt service costs, and to minimize refinancing risk by improving the maturity profile of our debt. The Government Debt Securities Law has been enacted, and an interdealer market has been established to provide transparent price discovery for market players. We are strengthening the regulatory framework and developing the market infrastructure needed to enhance the liquidity of the secondary market for government securities. We have also issued decrees setting out the procedures for issuing government securities, enabling auctions to begin on a regular basis. Moreover, the structure of our debt has been significantly improved by the reprofiling of government recapitalization bonds held by state banks, and the debt stock has been reduced by using asset recoveries to redeem bonds. We intend to take further steps to reduce the burden of the public debt through exchange offers and debt buybacks. The agreement between the government and BI concerning financial issues related to the BLBI has been presented to Parliament. We will work closely with Parliament to ensure its timely implementation, which will reduce the public debt burden while preserving the financial soundness of the central bank.


13. While significant progress has been made, further work is needed to strengthen the fiscal, legal, and administrative framework for decentralization. A priority will be to strengthen the procedures governing the issuance of regional regulations that have the potential to conflict with the national interest. To this end, we intend to continue our efforts to enforce existing reporting requirements and ensure compliance with government directives canceling problematic regulations.

14. The development of an effective regional budget reporting system also remains a priority. While some progress toward this objective was made in 2002, with the finalization of the regions' 2001 accounts, further efforts will be necessary in the coming year to establish a comprehensive quarterly reporting system. The strategic aim remains to produce regular quarterly budget reports within six months of the end of each quarter. To ensure timely data submission, sanctions such as postponement of transfers will be imposed on regions that fail to comply with the reporting requirements. We have prepared a preliminary report on the regional budget outturn for the first half of 2002, and aim to complete a report with coverage of at least 85 percent of the regions by end-April; we also aim to produce the full year report by June 2003. During the first half of the year, the government will issue generally accepted government accounting standards to ensure uniform reporting standards across regions. Existing regulations on local government financial management will be modified in line with these standards. New government accounting systems are being developed to support the implementation of the forthcoming standards, and will be introduced on a gradual basis over the course of the year.

15. A ministerial decree has been issued extending the existing moratorium on local government borrowing (except through the center) until end-2003. This is needed to provide additional time for the reporting system to become fully operational. In the meantime, we are working to strengthen the borrowing framework for regional governments. We are also putting in place a framework to enable regions to borrow from external sources through the central government.

Fiscal Transparency and Public Sector Governance

16. Improving fiscal transparency and public sector governance remain priorities in 2003. We will continue our efforts at budget consolidation. All remaining funds not previously consolidated will be brought under the control of the central government by June 2003. The State Audit Agency (BPKP) will continue its routine audits of government agencies with a view to identifying any additional nonconsolidated funds. The main findings of the audit of the Reforestation Fund completed last year have been submitted to Parliament, and corrective action plans adopted. The primary actions are to integrate its bank accounts into the Treasury and bring their use under the control of the Ministry of Finance. The first progress report on the implementation of the corrective action plans will be published by September 2003. In addition, the main findings of the audits of the two investment funds (RDI and RDA) completed last year have been submitted to Parliament. Necessary corrective action plans will be developed by the government in consultation with Parliament.

17. The performance of the public sector is also being strengthened through the ongoing program of performance audits of state enterprises: (i) corrective actions identified under the second round-audits are being carried out (for Garuda, Pelindo II, Jasa Marga, Telkom, PT PN-IV), and a progress report on their implementation has just been published; (ii) the third-round audits (for PT Dirgantara, PT Kereta Api, PT Taspen, Semen Gresik, and PT Pusri) are underway, and are expected to be completed by July, with corrective actions beginning in August; and (iii) a fourth round of audits, covering state enterprises in the banking, transportation, tourism, and basic industry sectors, will be launched by June 2003, for completion in early 2004.

18. The legal framework for public sector financial management is in the process of being updated. The recently approved law on state finances, which covers all state funds in all state institutions, and the draft laws on state treasury and state audit, aim to improve accountability and transparency in government financial management. We have asked Parliament to prioritize the finalization of these laws. On our part, we are in the process of revising the drafts in light of comments received from Parliament, and intend to strengthen the drafts further to bring the legislation into line with international best practice. Specifically, we would like to ensure that the draft state audit law, which complements Law 5/1973, does not undermine the constitutional authority of the Supreme Audit Agency (BPK).

19. The government will also take steps to strengthen the framework for auditing military and other foundations receiving state funds or financing state activities. The government is preparing amendments to the Foundations Law, to be presented to Parliament in its next session, to clarify the legal basis for the BPK to undertake such audits.

Balance of Payments and External Policies

20. The external current account recorded another sizeable surplus in 2002, estimated at $7.2 billion (4.2 percent of GDP), facilitating a further build-up in international reserves. The surplus, however, is expected to narrow in 2003, as imports rebound and tourism receipts recover only gradually in the aftermath of the Bali incident. The capital account is also expected to remain in deficit. Even still, gross international reserves are targeted to rise by $0.6 billion, sufficient to maintain import coverage at current levels and to increase the coverage of short-term debt.

21. The government remains committed to a liberal and open trade regime, and will continue to honor its WTO and AFTA commitments. We will maintain our dialogue with concerned IFIs on a regular basis to review our overall trade strategy.

II. Structural Reforms

Financial Sector

22. A core objective of our economic strategy in 2003 is to further advance the process of bank restructuring and to restore a strong, private sector-led banking system essential for establishing efficient credit flows and reviving investment. Accordingly, the 2003 program includes further significant progress in the bank divestment program, and improving the governance of state banks.

Bank Divestment and Restructuring

23. With regard to IBRA bank divestment, the sale of Bank Danamon has been launched, and is expected to be completed by April. We also plan to launch the sale of Bank Lippo in the second quarter, with a view to completing its sale by end-September. The government remains committed to selling the remaining IBRA banks by the time IBRA winds down in early 2004.

24. Our efforts to strengthen state bank governance center on steps to improve oversight and accountability. First, we are strengthening the capacity of the Ministry of State-Owned Enterprises to monitor state bank performance, and additional staffing resources are being provided to the Ministry for this purpose. Second, additional independent, qualified commissioners will be appointed, with a view to ensuring that each state bank has four to five commissioners by mid-year. Third, new annual performance contracts will be prepared by April, which will contain benchmarks developed from their annual business plans. And finally, the external audit mechanism of state banks will be strengthened in the first half of the year, through the development of follow-on external audit corrective action plans.

25. With respect to the restructuring and divestment of state banks, the initial public offering (IPO) of Bank Mandiri is expected to be listed in the second quarter, following the issuance of the final prospectus in April. We intend to announce a strategic plan for the future of the bank in the second half of the year. We also expect to launch an IPO of shares in BRI during the second half of 2003. The strategy for BNI is to implement its approved business plan that sets forth action items designed to strengthen the bank, such as improving the quality of assets, developing the information technology network, and continuing further divestment efforts. We will develop, during the second quarter, a time-bound action plan to resolve its impaired assets. With respect to BTN, external consultants have been engaged to develop a restructuring plan, based on which we will adopt a specific implementation schedule based on the plan by end-March 2003.

Financial Sector Safety Net

26. The Ministry of Finance, with inputs from Bank Indonesia, is developing a comprehensive plan for a sound financial sector safety net, expected to be completed by end-March 2003. The key elements of the plan are to create a limited coverage deposit insurance scheme (LPS), an enhanced lender of last resort function for BI, a framework for bank resolution, and an agency that integrates supervision and regulation of the financial sector (OJK). The plan will also set out criteria and procedures for bank resolution through a Committee chaired by the Ministry of Finance with representatives of OJK, BI, and LPS.

27. The plan will contain detailed proposals on the institutional structure of the financial safety net and on sequencing and transitioning arrangements, including measures for an orderly phase-out of the blanket guarantee. In this regard, the first task will be to establish a deposit insurance agency to administer a deposit insurance fund financed by premiums paid by the banking sector, and with a role in bank resolution. We will also give priority to a review of BI's lender of last resort function, including any needed changes to the BI law, to ensure that it will be adequate to provide emergency liquidity support to the banking sector once the blanket guarantee is removed.

28. We are also preparing the groundwork for the new Financial Supervisory Agency (OJK). Safeguards will be put in place to ensure the independence of the new agency and that its funding arrangements provide it with adequate resources to attract and retain staff with appropriate skills and experience. The transition to the OJK will be managed carefully to ensure that financial system stability and effective supervision are not undermined. We will utilize an independent assessment of the supervision of the nonbank financial sector against the relevant international standards, and will prepare action plans to remedy any identified deficiencies prior to the transfer of these functions to the new agency.

Bank Indonesia

29. We remain committed to improving the oversight and accountability of the central bank, in a manner that preserves its operational independence. In line with this objective, we intend to work with Parliament to enact amendments to the central bank law that are fully consistent with the recommendations of the independent panel of experts published in April 2001. In line with international practice, BI will also establish an audit committee, whose membership will include outside experts, to subject its internal financial policies and procedures to regular independent review. As a follow-up to the recommendations from the mid-year review of its foreign exchange operations, BI is taking steps to strengthen its control and accounting procedures. Progress in this regard will be reviewed in the context of BI's forthcoming 2002 annual audit, conducted by its constitutionally appointed auditor. The process of restructuring BI's overseas subsidiary is proceeding and its sale will be completed in the first half of 2003. Assets removed in the restructuring process will be sold by the end of the year.

30. As part of ongoing efforts to bring the banking supervision function, currently located in BI, into line with international best practice, we will reform the organization of this function to improve its efficiency, accountability and internal coordination. This is expected to be completed by September. Also, BI will establish by June a dedicated financial stability unit to monitor the soundness of the overall financial system.

IBRA Asset Recoveries

31. The strategy remains to maximize recoveries from IBRA's remaining assets, in advance of its scheduled winding-down. In this regard, IBRA has announced a detailed plan for asset recovery, with quarterly targets, to meet its annual asset recovery target of Rp 26 trillion. To ensure transparency, the Oversight Committee (OC) is reviewing the proposed asset sales mechanisms, and will provide any recommendations regarding their strengthening to IBRA and the FSPC. The FSPC will publish its decisions regarding the mechanisms chosen for these sales, as well as its responses to OC recommendations.

32. We are nearing final resolution of the bank shareholder settlement agreements. We aim to collect Rp 6-7 trillion from these agreements in 2003. All noncash assets pledged or that have fallen due under agreements with cooperative shareholders are being transferred to IBRA; this process is planned for completion by May. We have collected the initial 30 percent cash payment due from 9 out of 30 shareholders of banks closed in 1999 and 2000 (so-called APU cases) under the revised settlement terms set out in the October 2002 FSPC decision. With regard to shareholders of banks closed in 1998 who issued personal guarantees toward settling their obligations (under the so-called MRNIAs), we will conduct forensic audits to identify any additional shareholder assets that may be needed to settle outstanding obligations under existing agreements. Full settlement of the commercial terms stipulated under all the bank shareholder agreements is due by June 2003.

33. As set out in Presidential Instruction No. 8 signed on December 30, 2002, the government remains committed to taking strong legal and other enforcement actions against former bank shareholders who fail to meet their obligations under their settlement agreements. We are increasing the effectiveness of our enforcement strategy by including the original Directors and Commissioners of noncompliant shareholders' banks in our legal actions. The cases of five noncompliant shareholders were transferred to the police and AGO in February, and IBRA is preparing to forward 12 additional cases to the legal authorities, thereby covering all shareholders who failed to make the initial payment under the revised settlement agreements for banks closed in 1999 and 2000, as well as two other noncompliant shareholders. To those who have fulfilled their obligations under the shareholder settlement agreements, the government is ceasing legal actions relating to any criminal charges or other irregularities that gave rise to the agreements.

34. IBRA is finalizing its plans for the winding down of its operations. Administrative preparations are well advanced and a strategy for the resolution of any assets that may remain unsold at the end of IBRA's mandate will be finalized and published by September 2003. The strategy will ensure that adequate recoveries will be maintained, on the basis of full transparency and accountability, after IBRA is closed.


35. The government remains committed to its privatization program, which is critical for improving economic performance and strengthening the public finances. The divestment plan for 2003, which builds on the progress generated in 2002, is designed to achieve the budget target of Rp 8 trillion. The plan has been approved by the Privatization Committee chaired by the Coordinating Minister for Economic Affairs.

Corporate Debt Restructuring

36. With the Jakarta Initiative Task Force's (JITF) mandate set to expire on December 31, 2003, the strategic objective now is to process the remaining 40 cases in its docket (total debt of $10.1 billion), through either mediated resolution or dismissal. In 2002, the JITF met its targets for debt restructurings, and by end-December the cumulative total for JITF-mediated debt reaching the MOU stage amounted to $18.9 billion, representing the debt of 86 companies. Going forward, the JITF aims to process half of its remaining cases by July, and by November it will issue a final report, setting forth its assessment of corporate debt restructuring, and outlining the disposition of all major cases during the course of its operations.

III. Policies to Improve the Investment Climate

37. While significant progress has been made under the program to restore macroeconomic stability and advance the structural reform agenda, investment--the engine of long-term growth and employment generation--remains weak. A number of the policies described above will contribute to an improvement in the investment climate. These include improvements to the decentralization framework, strengthened tax and customs administration, improved public sector governance, and maintenance of a liberal trade regime. In addition, establishing certainty for investors with respect to the application of commercial and bankruptcy laws, and improving the industrial relations framework are also important for improving the investment climate.

Legal and Judicial Reform

38. The emphasis in 2003 will be on the further development of the Commercial Court, which has jurisdiction over bankruptcy and intellectual property rights cases. A number of steps have already been taken to strengthen the administration and procedures of the Court, and to enhance the transparency of the Court's decisions. The Blueprint formulated in 2001 for the development of the Commercial Court has been key to this effort and an updated version will be issued in May 2003. Going forward, emphasis will also be placed on setting the Court's finances on a sounder basis. To maintain the capacity of the Court and the transparency of its decisions, we will work with the Supreme Court to restore the number of qualified ad hoc judges to an adequate level.

39. With respect to other judicial reforms, the government intends to work closely with the Supreme Court and other concerned parties to facilitate the establishment of a Judicial Commission, an initiative central to strengthening the governance and administration of the judiciary. The Supreme Court is currently finalizing its proposals in this area, and the law establishing the Commission is expected to be adopted by end-2003. Steps will also be taken to ensure that the Anti-Corruption Commission (ACC) is fully operational by no later than December 2003, as required by the Anti-Corruption law. In this regard, the government intends to submit names of candidates for the five positions of members of the ACC to Parliament by July 2003.

40. We intend to integrate the functions of the Independent Commission for the Audit of the Wealth of State Officials (KPKPN) into the ACC, as required by the Anti-Corruption law, in a manner that preserves the integrity of the wealth declaration process. To this end, the government will issue a decree by August 2003 that will ensure that the capacity to obtain and analyze wealth declarations is maintained, and that the ACC has the powers to enforce the wealth declaration requirements.

41. The government is working with Parliament to expedite passage of amendments to the bankruptcy law, which is expected in the second quarter of 2003. The amendments improve the existing law by adding definitions and clarifications on a number of points that will make the law easier to apply in practice.

Labor Policies

42. Establishing a sound framework for labor relations is central to generating employment, improving the welfare and skills of workers, and providing a stable environment for business. Following the major reform of the rights of association and union activity in 2000, modernization of complementary labor legislation relating to industrial relations has become a priority. A bill relating to labor protection has now been passed, and we are working closely with Parliament to ensure that the other bill in this area, on industrial dispute resolution, is enacted during the first half of 2003. We are working with labor and business to ensure that the laws strike an appropriate balance between protecting the rights of workers, including freedom of association, and preserving a flexible labor market.

43. With the devolution of minimum wage setting to the regions, it has become increasingly important to provide standards to guide the minimum wage setting process to ensure that it is in accordance with the national interest. To this end, we have recently reconvened the national tripartite council comprising government, labor groups, and employers to consider options for developing national guidelines in this area. The council will be a regular vehicle to facilitate a national dialogue on broader labor policy issues.

Table 1. Indonesia: Macroeconomic Framework, 2002–03

Real GDP growth 3.7 4.0
Inflation (end of period) 10.0 9.0
Current account balance
In billions of U.S. dollars 7.2 4.7
In percent of GDP 4.2 2.2
Gross reserves (in billions of U.S. dollars) 32.0 32.6
Central government balance (in percent of GDP) -1.6 -1.8
Revenues and grants 18.6 17.3
Expenditures and net lending 20.3 19.1
Base money growth (end of period) 8.3 13-14

Table 2. Indonesia: Quantitative Performance Criteria (PC) and Indicative Targets (IT) Under the Extended Arrangement, 2002-031
Dec. Mar. Jun. Sep. Dec.

PC2 Actual PC   PC   IT   IT  

Monetary and fiscal targets  
Net domestic assets (NDA) of Bank Indonesia 10.9 -16.8 -24.5 -19.4 -15.6 0.6
Base money (indicative target)3 138.2 132.2 129.3 134.5 138.1 150.4
Overall central government balance4 -42.1 -26.3 -7.6 -15.6 -25.6 -34.4

External targets (in billions of U.S. dollars)

Net international reserves (NIR) of Bank Indonesia5







Contracting or guaranteeing of new noncessional external debt6







Of which: Government debt to commercial creditors







Stock of short-term external debt outstanding







1Definitions are contained in the attached Technical Memorandum of Understanding. Continuous performance criteria are: the nonaccumulation of public external arrears and no securitization or forward sale of receipts from natural resources.
2Adjusted program targets for NDA and NIR.
3Base money targets are one-month averages centered on end-month.
4Cumulative balances from beginning of fiscal year (floor). Central government bonds issued to district and provincial government are included as financing of the central government deficit.
5Outstanding stocks (floor).
6Cumulative amounts from beginning of fiscal year (ceilings).

Table 3. Indonesia: Structural Benchmarks

March 2003

  • Finalize comprehensive plan for financial sector safety net.

  • Formulate plans and targets for audits, tax arrears collection, and registration of taxpayers.

  • Collect at least Rp 3 trillion in cash by IBRA (net of expenses).

  • Adopt implementation schedule for the restructuring of BTN.

April 2003

  • Conclude majority divestment of Bank Danamon.

  • Launch majority divestment of Bank Lippo.

  • Finalize blueprint for strengthening the treasury and budget functions of the Ministry of Finance.

  • Issue ministerial decree liberalizing conditions under which VAT refund claims may be approved.

June 2003

  • Collect at least Rp 7 trillion in cash by IBRA (net of expenses).

  • List IPO for Bank Mandiri on the stock exchange.

  • Appoint additional commissioners to ensure each state bank has four to five commissioners in place.

  • Launch a fourth round of performance audits of state enterprises.

  • Produce report on 2002 local government finances, with coverage of at least 85 percent of jurisdictions.

  • Complete sale of BI's overseas subsidiary.

September 2003

  • Collect at least Rp 18 trillion in cash by IBRA (net of expenses).

  • Launch IPO for BRI.

  • Finalize strategy for the resolution of assets that may remain unsold at the end of IBRA's mandate.

December 2003

  • Launch majority divestment of remaining two IBRA banks.

  • Announce strategic plan for future of Bank Mandiri.

  • Complete the expansion of large taxpayers' offices to increase coverage to 35 percent of the tax collections of the Directorate General of Taxation.

  • Ensure that the Anti-Corruption Commission is fully operational.

  • Achieve budget privatization target of Rp 8 trillion.

Revenue Administration Initiatives for 2003

Key initiatives for strengthening revenue administration are set out below.

March 2003, Directorate General of Taxation approves an "extensification" program that will register 60,000 companies and 50,000 individuals. Ten percent of the individual registrants will have income of at least Rp 100 million. A tax return for 2002 income and profits taxes will be secured from 60 percent of the new registrants.

March 2003, Directorate General of Taxation formulates a national audit plan for 2003 that provides for (nonrefund) audits of 1,250 "large" taxpayers and 12,600 "medium-sized" taxpayers.

March 2003, Directorate General of Taxation formulates a national arrears collection plan for 2003 aimed at: (1) keeping the stock of tax arrears deemed to be collectible at a level no higher than that at the end of 2002, and (2) resolving 5 of the largest 10 arrears cases deemed to be uncollectible.

March 2003, Directorate General of Taxation formulates a plan to control registered taxpayers who fail to file tax returns.

March 2003, Directorate General of Taxation prepares a plan to further modernize the large taxpayer offices' taxpayer services, audit, arrears collection, and information technology programs during 2003.

March 2003, Directorate General of Taxation and Directorates General of Customs and Excises (DGCE) will reach agreement on a program of cooperation with the National Ombudsman Commission (NOC) to publicize the existence of the NOC, establish time standards for responding to NOC recommendations on specific cases, and make summary information available to the public two times per year on the actions taken by DGT and DGCE in implementing NOC recommendations.

April 2003, the Ministry of Finance's Inspector General submits to the Minister of Finance the first of four quarterly reports detailing violations of the tax and customs codes of conduct, the number of investigations initiated and completed, and the number and types of sanctions imposed. Within two weeks of receipt by the Minister, summary statistics from the report will be made available to the public.

April, 2003, Ministerial Decree issued that liberalizes the conditions under which claims for VAT refunds may be approved without requiring a pre-refund audit (but continuing to allow post-refund audits on a selective basis), with a view to increasing the coverage of nonrefund audits.

April 2003, Director General of Customs and Excises implements the first phase of the customs administration modernization strategy involving trade facilitation, combating undervaluation, and promoting governance, and approves a detailed work plan for the balance of 2003 and 2004.

May 2003, the Minister of Finance will appoint a task force (comprising private sector representatives and public sector officials) to review all aspects of the value-added tax--including its policy features, administrative provisions, information reporting requirements--with a view to proposing ways to reduce the cost of compliance to taxpayers and cost of administration to the government. A draft report will be submitted to the Minister of Finance by September 2003 and final report by December 2003.

June 2003, the electronic tax filing and payment system will be expanded to process 75 percent of DGT tax collections. The electronic payment system will also be introduced at one large customs office and one large budget office to process the remittance of import duties and taxes collected or withheld by these offices.

June 2003, the inter-ministerial task force will prepare a government-wide anti-smuggling strategy. The strategy is to be approved by the government and begin to be implemented by end-June 2003.

June 2003, Directorate General of Taxation prepares a plan to expand the large taxpayer offices by December 2003 to administer those taxpayers who collectively account for 35 percent of total DGT tax collections.

June 2003, the government will allocate sufficient resources to the National Ombudsman Commission to establish 5 regional offices and create a telephone hotline by end of December 2003.

June 2003, the Ministry of Finance will streamline the procedures by which it requests from BI access to a taxpayer's banking information in cases where a bonafide tax audit has been initiated. The new procedures will include appropriate safeguards to protect confidentiality and taxpayers' rights.

July 2003, Directorate General of Taxation will instruct tax offices to conduct tax audits of companies in the oil and gas sector.

July 2003, Directorate General of Taxation and the MOF Inspector General's office will extend the governance framework for tax officers--including the code of conduct, hotline for taxpayers to report misconduct by tax officers, code of conduct committee, and special team of inspectors at the Inspectorate General--at all DGT tax offices. A "Taxpayer Bill of Rights" will also be introduced.

December 2003, Directorate General of Taxation will complete the expansion of the large taxpayers' offices to administer those taxpayers who collectively account for 35 percent of total DGT tax collections.

December 2003, revise the Law on General Rules and Procedures of Taxation and the Law Concerning Tax Collection and present to Parliament for approval.

Indonesia: Technical Memorandum of Understanding
March 18, 2003

A. Monetary Targets

1. Performance Criterion on Net Domestic Assets
Outstanding Stock As Of: Program Limit
(In trillions of rupiah)

End-December 2002 (actual) -16.8   
End-March 2003 (performance criterion) -24.5   
End-June 2003 (performance criterion) -19.4   
End-September 2003 (indicative target) -15.6   
End-December 2003 (indicative target) 0.6

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 billion1 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 equation 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; equation is the change in the reserve requirement ratio; and equation denotes the immediate change in the rupiah reservable base as a result of changes in its definition.

2. Indicative Targets on Base Money
Outstanding Stock of Base Money As Of: Indicative Limit
(In trillions of rupiah)

End-December 2002 (actual) 132.2
End-March 2003 (indicative target) 129.3
End-June 2003 (indicative target) 134.5
End-September 2003 (indicative target) 138.1
End-December 2003 (indicative target) 150.4

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)
Cumulative Balance

(In trillions of rupiah)

From January 1, 2003 to:


End-March 2003 (performance criterion)


End-June 2003 (performance criterion)


End-September 2003 (indicative target)


End-December 2003 (indicative target)


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 (including 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. Income from recapitalization bond interest and payments of deposit guarantee premia are excluded.

D. External Sector Targets

1. Performance Criterion on Net International Reserves of Bank Indonesia
Outstanding Stock As Of: Floor
(In billions of U.S. dollars)

End-December 2002 (actual) 22.2
End-March 2003 (performance criterion) 22.2
End-June 2003 (performance criterion) 22.2
End-September 2003 (indicative target) 22.2
End-December 2003 (indicative target) 22.2

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 based on data from the general ledger of BI. 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 Nonconcessional External Debt

Cumulative Change in Stock

(In billions of U.S. dollars)

From end-December 2002 to:

End-March 2003 (performance criterion)


End-June 2003 (performance criterion)


End-September 2003 (indicative target)


End-December 2003 (indicative target)


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 
Cumulative Change in Stock

(In billions of U.S. dollars)

From end-December 2002 to:


End-March 2003 (performance criterion)


End-June 2003 (performance criterion)


End-September 2003 (indicative target)


End-December 2003 (indicative target)


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

Outstanding Stock As Of:

(In billions of U.S. dollars)

End-December 2002 (actual)


End-March 2003 (performance criterion)


End-June 2003 (performance criterion)


End-September 2003 (indicative target)


End-December 2003 (indicative target)


The limits apply to the stock of debt 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

Cumulative Amounts From

(In billions of U.S. dollars)

BOP Support1

From end-December 2002:

End-March 2003


End-June 2003


End-September 2003


End-December 2003


1Includes all quick-disbursing balance of payments support loans from multilateral and bilateral sources, including similar loans channeled to the government budget and rescheduling of government or Bank Indonesia debt-service falling due, but excluding short-term loans that are reserve liabilities of BI as well as IMF purchases.

2. Exchange Rates and Gold Price to be Used Under the Program1


Foreign Currency per U.S. dollar

Japanese yen 104.85
Deutsche mark2 1.8711
Pound sterling 0.61177
French franc2 6.2753
Swiss franc 1.5339
SDR 0.72426
Euro 0.9567
Gold price (U.S. dollars per ounce) 299.10

1Currencies not shown here will be converted using the official rate for October 31, 1999 used by IMF's Treasurer's Department.
2Deutsche mark and French franc are converted against the euro based on fixed conversion rates as of December 31, 1998.

3. Reporting

Monitoring the program requires accurate and timely data. All information on performance criteria, indicative targets, and balance of payments support loans will be reported to Fund staff within two weeks of the reference date with the exception of data on the central government balance, which will be provided within one month. In addition, detailed data on government revenues and expenditures, costs of financial sector restructuring, and the monetary survey will be provided monthly within 30 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 monthly (with a five-week 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.