Press Release No. 04/148

The following statement was released in Jakarta earlier today by an International Monetary Fund (IMF) staff mission:

An IMF staff team from the Asia and Pacific Department has completed one of its periodic visits to Jakarta, held during July 8-15. The purpose of the visit was to exchange views on recent economic developments and the outlook, as well as to continue the policy dialogue with the authorities.

GDP growth for 2004 is on course to reach the government's target of 4.8 percent, driven mainly by private consumption and supported by a favorable external environment. However, inflation has picked up in recent months, due in part to a rise in food prices, and is now projected to reach around 7 percent by year-end. On the external front, the current account is expected to remain in surplus at around 2½ percent of GDP for the year, with official foreign exchange reserves declining to around $34 billion by year-end, a level still sufficient to cover 150 percent of short-term debt.

Maintaining macroeconomic stability remains a priority. To that end, the central bank has recently implemented a package of measures intended to rein in liquidity to counter inflation and depreciation pressures on the rupiah. Preparations for the planned move to inflation targeting are underway, and during the transition the staff team welcomes Bank Indonesia's commitment to adjust the monetary stance as needed to maintain low inflation.

The budget deficit through the first half of 2004 was within the projected level, and the government reiterated its commitment to achieving the annual deficit target of 1.2 percent of GDP by monitoring spending and revenue developments closely during the remainder of year. For 2005, the government's proposed "baseline" deficit target of 0.8 percent of GDP is consistent with the overall envelope of financing resources, and would keep the debt-to-GDP ratio on a firmly declining path. The proposal incorporates ongoing tax administration efforts to raise revenues, while on the expenditure side, it seeks to ensure an adequate level of development spending. The staff team sees scope to increase social and infrastructure spending further by reallocating spending from low priority areas.

Financial sector indicators have continued to strengthen, with the profitability of the banking sector showing positive gains, helped by a decline in funding costs. The authorities are continuing with efforts to build a sound and competitive banking sector, including through greater private sector participation in the system. In this regard, the staff team welcomes the decision to proceed with the divestment of Bank Permata.

In the important area of legal and judicial reform, parliamentary discussions have advanced on both the Judicial Commission and the amendments to the Bankruptcy Law. In addition, management of the judiciary has been transferred to the Supreme Court which, together with the Judicial Commission, should contribute to an enhancement of legal certainty for investors. Going forward, further efforts will be needed, not only to improve certainty in the legal system, but more broadly to address a variety of other weaknesses in the investment climate.

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