Full text of IMF statement on Indonesia<\/p>\n
JAKARTA (JP): The following is the full text of the statement
\nyesterday by International Monetary Fund (IMF) Managing Director
\nMichel Camdessus on the IMF fresh reform program with Indonesia:<\/p>\n
As you know, an IMF staff team together with Mr Fischer and
\nmyself, have over the last few days been discussing with
\nIndonesian authorities an acceleration and deepening of much
\nneeded reforms agreed under the IMF supported program.<\/p>\n
This is why I am pleased today to announce that the government
\nof Indonesia and the International Monetary Fund have reached
\nagreement on a much strengthened and reinforced economic program.<\/p>\n
Many of the measures in this program are new, others have been
\nthere from the beginning but are now being accelerated, but all
\nhave one common purpose: they aim to restore confidence in the
\ncurrency and in the economy, by demonstrating that the government
\nrecognizes the problems confronting the country and is prepared
\nto take the necessary measures to overcome them, even if they are
\ndifficult and painful.<\/p>\n
Let me summarize briefly the program that we have just agreed.<\/p>\n
First, the broad macroeconomic framework. The program is
\ndesigned to avoid a decline in output, while containing inflation
\nto 20 percent this year, with the aim of bringing it back to the
\nsingle digit level next year, despite the sharp depreciation of
\nthe rupiah.<\/p>\n
At the same time, the external current account balance is
\nexpected to move from a deficit into a sizable surplus, thereby
\ngenerating additional foreign exchange to help the country to
\nrepay its external debt.<\/p>\n
Second, the budget. The 1998\/99 budget will be revised, to
\naccord with the newly agreed macroeconomic framework, while still
\nadhering to Indonesia's long-standing balanced-budget principle.<\/p>\n
Based on the IMF presentation, this would imply that the
\nbudget would record a small deficit, of about 1 percent of GDP, a
\nlevel that strikes an appropriate balance between the need to
\navoid an undue fiscal deterioration, and the need to avoid a
\nfiscal contraction that would further depress economic activity.<\/p>\n
Nevertheless, to achieve this objective, serious measures will
\nstill be required. In particular, action will need to be taken to
\ncurb energy subsidies, which have grown to unsustainable
\nproportions as the rupiah's depreciation has pushed domestic
\nprices far below world levels.<\/p>\n
Accordingly, the government will phase out subsidies gradually
\nby raising both fuel and electricity prices in steps, except for
\nthose on kerosene and certain diesel fuels, where increases will
\nbe kept to a minimum, so as to protect the poor.<\/p>\n
Third, fiscal transparency. In order to ensure that the public
\nis kept fully informed of all government activities, the accounts
\nof the Reforestation and Investment Funds will be brought onto
\nthe budget in 1998\/1999.<\/p>\n
Fourth, public sector projects. Under current economic
\nconditions, public spending must be limited only to those items
\nthat are of vital importance to the country. For this reason, the
\nprogram envisages that development spending will be curtailed,
\nincluding by canceling immediately the 12 infrastructure projects
\nthat were recently postponed or placed under review.<\/p>\n
Moreover, budgetary and extra-budgetary support and credit
\nprivileges granted to IPTN's airplane projects will be
\ndiscontinued, effective immediately. In addition, all special
\ntax, customs and credit privileges for the national car project
\nwill be revoked, effective immediately.<\/p>\n
Fifth, monetary policy. Monetary policy will need to be kept
\nfirm for a sustained period, until confidence in the currency is
\nrestored.<\/p>\n
To signal the government's commitment to this stance, Bank
\nIndonesia will be given full autonomy to conduct monetary policy
\nand start immediately to unilaterally decide interest rates on
\nits SBI certificates.<\/p>\n
As the program measures take hold and confidence returns,
\nmarket interest rates should gradually begin to fall, while
\ncapital that has moved overseas should return to the country,
\nproviding the banks with sufficient liquidity to resume their
\nlending activity.<\/p>\n
Sixth, bank and corporate sector restructuring. It has become
\nvitally important to restore the banking system to financial
\nhealth and to alleviate the difficulties of the corporate sector.
\nSpecific plans to assist the banking system are now being
\nformulated, which will be announced over the coming days.<\/p>\n
Seventh, structural reforms. The program envisages that
\nvirtually all of the restrictions that have been put in place
\nover time will soon be swept away. For instance:<\/p>\n
From Feb. 1, Bulog's monopoly will be limited solely to rice.
\nThis means its existing monopoly over the import and distribution
\nof sugar as well as its monopoly over the distribution of wheat
\nflour will be eliminated.<\/p>\n
To complement this action, domestic trade in all agricultural
\nproducts will be fully deregulated, so traders will have the
\nfreedom to sell their goods wherever they want and to whom they
\nwant. The Clove Marketing Board will be eliminated by June 1998.<\/p>\n
As of Feb. 1, all restrictive marketing arrangements will be
\nabolished, leaving firms free to produce and export their
\nproducts as they wish, and as the market decides. Specifically,
\nthe cement, paper, and plywood cartels will be dissolved.<\/p>\n
Another pressing need in the current circumstances is to
\nencourage foreign investment. Accordingly, for instance, by Feb.
\n1 all formal and informal barriers to investment in palm oil
\nplantation will be removed, while all restrictions on investment
\nin wholesale and retail trade will be lifted.<\/p>\n
Measures are also being taken to alleviate the suffering
\ncaused by the current, severe, drought. The program envisages
\nthat community-based work programs will soon be introduced to
\nsustain the purchasing power of the poor.<\/p>\n
In addition, to ensure that adequate food supplies are
\navailable at more reasonable prices, effective Feb. 1, tariffs on
\nall food items will be cut to a maximum rate of just 5 percent,
\nwhile tariff rates on non-food agricultural products will be
\nreduced by 5 percentage points.<\/p>\n
Last but not least, particular attention is being paid to the
\nproper financing of small and mid-size enterprises and exporters.
\nTo make funds available for this purpose through the banking
\nsystem, the Asian Development Bank is putting in place a
\nprogram whose details will be announced shortly.<\/p>\n
As you can see, this program has a very strong structural
\ncomponent, in the financial sector as well as in the corporate
\nsector. The intensive involvement of our friends from the World
\nBank and the Asian Development Bank is therefore crucial for
\nsuccessful implementation.<\/p>\n
I am pleased that the staffs of our international
\norganizations are cooperating effectively, and I am also happy to
\ntell you that Mr. Wolfensohn, the President of the World Bank,
\nwill visit Indonesia shortly.<\/p>\n
As President Soeharto wishes to take personal responsibility
\nfor the quick and full implementation of the program, he has
\ndecided that the people of Indonesia must be fully informed of
\nits content through the immediate publication of the Letter of
\nIntent, which he has decided to sign personally.<\/p>\n
Moreover, he has decided that in order to ensure that the
\neconomic objectives are realized, he will appoint a high council
\nof economic ministers -- reporting directly to him -- to oversee
\nthe implementation of the program.<\/p>\n
In expressing my confidence in the success of this program, my
\nthoughts go to those who may experience hardships -- hopefully
\nfor only a short period of time -- because of the very strength
\nand rapidity of the adjustment process. The program provides for
\nstrengthened measures targeted to alleviating the plight of the
\nmost vulnerable people in the country.<\/p>\n
I would like the government of Indonesia to know that the
\nmanagement of the IMF is open to consider very favorably any
\nadjustments of budgetary allocations in this domain, provided
\nthese are financed by a corresponding reduction of other
\nbudgetary expenditures of lesser priority, military or otherwise.<\/p>\n
This revitalized program is bold and far-reaching, addressing
\nall of the critical problem areas of the economy and deserving
\nthe full support of the international community.<\/p>\n
I am confident that, if this program is implemented with the
\ndetermination and commitment that I myself have seen over, the
\npast two days, Indonesia should be able soon to begin to overcome
\nits economic crisis.<\/p>",
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