People's Republic of China and the IMF
People's Republic of China Hong Kong Special Administrative Region and the IMF
Indonesia and the IMF
Republic of Korea and the IMF
Malaysia and the IMF
Thailand and the IMF
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MANAGING DIRECTOR OF THE
INTERNATIONAL MONETARY FUND
January 16, 1998
I. OVERVIEW OF COUNTRIES IN THE REGION
I am pleased to announce that the government of Indonesia and the International Monetary Fund
have reached agreement on a much strengthened and reinforced economic program. It aims to
restore confidence in the currency and in the economy by demonstrating that the Indonesian
government recognizes the problems confronting the country and is prepared to take the
necessary measures to overcome them, even if they are difficult and painful.
Let me summarize briefly the program that we have just agreed.
- The program is designed to avoid a decline in output, while containing inflation to 20 percent
this year, with the aim of bringing it back to single digits next year.
- The budget. The 1998/99 budget will be revised, to accord with the newly agreed
macroeconomic framework, while still adhering to Indonesia's long-standing balanced-budget
principle. This would imply that the budget would record a small deficit, of about 1 percent of
GDP--a level that strikes an appropriate balance between the need to avoid an undue fiscal
deterioration and the need to avoid a fiscal contraction that would further depress economic
- Fiscal transparency. Accounts of the Restoration and Investment Funds will
be brought into the budget in 1998/99.
- Public sector projects. Under current economic conditions, public spending must be
limited only to those items of vital importance to the country. Twelve infrastructure
projects will be canceled. Budgetary and extra-budgetary support and credit privileges
granted to IPTN's airplane projects will be discontinued, effective immediately. In addition, all
special tax, customs, and credit privileges for the
National Car project will be revoked, effective immediately.
- Monetary policy. Bank Indonesia will be given full autonomy to conduct
monetary policy and begin immediately to unilaterally decide interest rates on its SBI certificates.
As the program measures take hold and confidence returns, market interest rates
should gradually begin to fall.
- Bank and corporate sector restructuring. It is vitally important to restore the banking
system to financial health and to alleviate the difficulties of the corporate sector. Specific plans to
assist the banking system are now being formulated.
- Structural reforms. The program envisages that virtually all of the restrictions that
have been put in place over time will soon be swept away. For example:
Let me mention one further significant point about the Indonesian program. President Suharto
has decided that, in order to ensure that the program is fully implemented and its objectives are
realized, he will appoint a high council of economic ministers that will report
directly to him to oversee implementation of the program.
- From February 1, BULOG's monopoly over the import and distribution of sugar, as
well as its monopoly over the distribution of wheat flour, will be eliminated.
- Domestic trade in all agricultural products will be fully deregulated. The Clove
Marketing Board will be eliminated by June 1998.
- All restrictive marketing arrangements will be abolished. Specifically, the
cement, paper, and plywood cartels will be dissolved.
- With respect to foreign investment, all formal and informal barriers to investment in
palm oil plantation will be removed, while all restrictions on investment in wholesale and retail
trade will be lifted.
- Measures are also being taken to alleviate the suffering caused by the current severe
This revitalized program is bold and far-reaching, addressing all of the critical problem areas of
the economy and deserving the full support of the international community. It provides for
strengthened measures targeted to alleviating the plight of the most vulnerable people in the
Korea's adjustment program had a difficult start when markets realized the full seriousness of
the foreign exchange situation. Through prompt implementation and acceleration of
the program, however, confidence has gradually improved, the official international community
came in with additional support, and creditor banks have started negotiations to
achieve a restructuring of Korea's debt. All this is a significant change, but difficulties
still lie ahead. The government has started a social dialogue with unions and employers,
and its success is crucial for ensuring that the overall program can be implemented with social
Significant progress has been made in the rehabilitation of Thailand's financial sector
and the external situation has improved. The government, in acting with determination
to implement the program, deserves our full support.
Some have asked if the Thai program will be "renegotiated" or "augmented." The authorities
have not requested a renegotiation of the program, nor an increase in the financing of the
program, which has been sufficient up to now. However, there will be a further program
review in February 1998, during which--among other things--the fiscal position will be
reassessed. This is not a renegotiation, but an adaptation of the program to evolving
While they have weathered the earlier storm, vigilance during the period
ahead--which is also a pre-election period--is necessary. In particular, the Philippine authorities
need to keep fiscal policy on track and to maintain the required degree of monetary
While affected by the turmoil in the region, Singapore has managed the situation well, owing to
sound macroeconomic policies and a strong financial position of its financial
institutions, as well as increased transparency.
China has been a stable part of the region, and a moderate slowdown in growth is
welcome. The government can now--in a preemptive fashion--deal with structural issues of
banks and state enterprises. China continues to enjoy a strong balance of
payments, and its authorities rightly intend to maintain the present value of the
Like other countries, Malaysia has experienced serious pressures in financial and exchange
markets, reflecting contagion effects from other countries in the region and--despite in many
ways strong economic fundamentals--concerns about its own macroeconomic vulnerabilities.
Over the past several months, the authorities have taken important preemptive measures to
address the situation, particularly on the fiscal side, notably in last month's economic
package, which I applaud. However, given the continued volatile market situation, I believe that
there is a need to strengthen policies further--particularly on the monetary side--to
achieve a better policy mix, underpin the restoration of market confidence, and thereby ensure a
rapid return to exchange rate stability and sustainable growth. Malaysia does not necessarily
need an IMF-supported program to achieve this. Our efforts, rather, are directed at
providing whatever advice and technical assistance we can to support the Malaysian authorities
in putting together their own comprehensive economic program, including measures in such
areas as financial sector reform and structural policies. To this end, an IMF
team has started the annual Article IV consultation, and will discuss formulation of a
II. THE IMF APPROACH
The IMF assists countries affected by the market upheaval since last summer to
reestablish confidence. The main emphasis is placed on:
(1) temporary tightening of monetary policy to help stop the
slide in exchange rates;
The goal is to let these economies emerge more strongly to resume rapid
(2) taking immediate action to correct obvious weaknesses in the
banking system--a major element in these crises; and
(3) implementing with determination structural reforms to remove long-standing
impediments to growth--rigidities, monopolies, and governance
The intermediate goal is to shorten the adjustment period and mitigate its effects
(1) provision of finance--our own, and arranging financing
III. THE IMF'S SOCIAL AGENDA
Let me elaborate more on this last, very important point: how to mitigate the social costs of
(2) budgetary flexibility to minimize output loss;
(3) alleviating the impact of credit tightness on exporters and small/medium
(4) alleviating the social costs of adjustment.
IV. SPECIFIC ISSUES
- First, correcting accumulated structural weaknesses and the resulting foreign exchange
problem inevitably involves a temporary slowdown in economic activity and
unavoidable social hardships. IMF programs are designed to shorten the period of adjustment
and minimize the loss in output.
- I frequently emphasize that, while the burden of adjustment is inevitable, a lopsided
distribution is not. I have, therefore, been encouraging a social dialogue between
employers, employees, and the government to advance necessary changes-- including
retrenchment of surplus labor--while, at the same time, ensuring both an alleviation, and an
equitable sharing of, the pain. The possible ways to achieve this include:
- For displaced workers: severance payments, unemployment insurance, continuation of health
insurance, retraining for new jobs, and improved labor exchanges.
- For the poorest sections of the society: targeted programs to ensure minimum standards of
nutrition, health, and shelter.
- At the same time, IMF-supported programs provide for needed flexibility in the
budget to support economic activity and finance unemployment and poverty alleviation
- Flexibility with respect to overall fiscal targets. While there is a need in most
IMF-supported programs to strengthen public finances, targets can be relaxed to avoid "fiscal
overkill" if there is a serious weakening of the economy.
- Flexibility with respect to the composition of expenditure. IMF-supported programs
encourage curtailment of unproductive expenditures and low priority investments to make room
for investment in human capital--education and health--and for social expenditures.
- Flexibility with respect to subsidies on essential products. While subsidies are an
inefficient way to protect the poor, many IMF-supported programs provide for a careful phasing
out rather than immediate abolition so as to avoid disruptions and hardships.
- Structural measures to eliminate monopolies and cartels (which benefit the few at
the expense of the many), increase competition, reduce tariffs, improve corporate governance,
and promote transparency.
- This underscores that the IMF is indeed sensitive to social concerns. IMF-supported
programs try to integrate socially-oriented measures with macroeconomic and structural
adjustments that are essential to reestablish sustained growth. And sustained
growth is the most powerful means of bringing unemployment down and reducing
and eventually eradicating poverty.
Finally, let me briefly comment on some specific questions and points of concern widely
discussed in recent weeks:
1. Is the Hong Kong peg safe?
Hong Kong, China, is prepared to make full use of interest rate policy. Hong
banks are in a strong position, and Hong Kong's reserves are high.
I am confident, therefore, that the peg can and will be sustained.
2. Is China going to devalue?
China is in a sound macroeconomic position, its balance of payments is strong,
and its reserves are high. The impact of the crisis on China's balance of payments will
need to be monitored carefully, but the authorities have clearly--and in my view
rightly--concluded that a devaluation of the renmenbi would not be appropriate at
3. Proposals for "currency board-like" arrangements?
Future exchange rate arrangemets in the region are a very important issue, and I
welcome the constructive debate now taking place. We in the IMF have an open
mind on such proposals, and we are studying them carefully. In the meantnime,
no time should be lost in acting to restore confidence so currencies can be
IMF EXTERNAL RELATIONS DEPARTMENT