News Briefs

Indonesia and the IMF





News Brief No. 00/38
June 2, 2000
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Completes First Review of Indonesia Under its Extended Arrangement

The International Monetary Fund's (IMF) Executive Board completed today its first review of Indonesia's performance under a three-year, SDR3.638 billion (about US$5 billion) Extended Fund Facility1 (see Press Release No. 00/4). This opens the way for release of a further SDR282 million (about US$372 million) from the arrangement, which will bring total disbursements to Indonesia under the current program to SDR542 million (about US$715 million).

At the conclusion of Executive Board discussions on Indonesia's economic and structural reform program, Stanley Fischer, First Deputy Managing Director, stated:

"Executive Directors welcomed Indonesia's recent progress in implementing important fiscal and structural reform measures. The key macroeconomic objectives for 2000 set out in the original program remain within reach. Prices are stable; the rebuilding of foreign exchange reserves has exceeded program targets; real GDP growth has become significantly positive in the last two quarters; and there is evidence that the poverty rate has come down from its 1998 peak.

"Nevertheless, the recent deterioration in market sentiment, and the resultant declines in the rupiah and in the stock market, underscore the need for clear and consistent implementation of the program. The keys to regaining market confidence are to make steady and visible progress in program implementation and to maintain clarity about the authorities' intentions and commitments. Critical priorities are the restoration of a sound banking system and resolution of the overhang of corporate debt, to be achieved amid conditions of improved governance. Progress in these areas is essential to maintain the intended thrust of the program, to sustain and broaden the emerging recovery, and to restore investor confidence.

"An orderly sequencing of fiscal decentralization is one of the key challenges facing the Indonesian authorities in the coming months, and crucial for maintaining fiscal sustainability. The authorities are cognizant of the risks involved and are taking steps to contain them. However, the operation is complicated and its risks remain high; strong safeguards will be necessary to protect the overall economic program. Carefully sequencing the devolution of spending responsibilities, preserving the effectiveness of transferred public services, and maintaining budget discipline at each level of government are among the key requirements for successful fiscal decentralization.

"The restoration of a sound banking system and the resolution of the corporate debt overhang are essential to restarting credit flows and creating the conditions for a resumption of private investment. Despite some delays, important progress has been made in financial sector restructuring, notably with regard to the recapitalization of state banks, and the sale of assets by the Indonesian Bank Restructuring Agency (IBRA). Short-term priorities include completing the restructuring and recapitalization of the state banks; preparing the IBRA banks for privatization; accelerating IBRA's asset recovery; publishing IBRA's 1999 audited accounts; and strengthening Bank Indonesia's supervision. Early establishment of an independent and accountable governing body for IBRA is essential given the size of the assets under its control and its pivotal role in debt restructuring.

"The government has now put in place all the elements of an enhanced debt-restructuring framework for the corporate sector, centered round a strengthened Jakarta Initiative Task Force and underpinned by specific measures to increase the legal deterrent on noncooperative debtors. The credibility of the overall program depends, importantly, on the authorities' ability to apply this framework forcefully so as to accelerate the debt restructuring process. Success will also depend on the effectiveness of measures in the program to improve governance of the judiciary," said Mr. Fischer.


1 The Extended Fund Facility supports medium-term programs that seek to overcome balance of payments difficulties stemming from macroeconomic imbalances and structural problems. The repayment terms are 10 years, and include a 4 1/2-year grace period on principal payments. It carries a variable annual interest rate, which is currently 5.18%.


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