IMF concludes Article IV consultation with Indonesia<\/p>\n
On Sept. 14, 2000, the International Monetary Fund's Executive
\nBoard concluded the Article IV consultation with Indonesia. The
\nfollowing is the complete report.<\/p>\n
WASHINGTON: Since the last Article IV Consultation, Indonesia
\nhas undergone a major political transition to democratic
\ngovernment. The reform program of the new government has been
\nstrongly supported by the international community. Indeed, the
\nnew government moved quickly to adopt a three-year IMF-supported
\neconomic program, and secured necessary financing assurances
\nthrough a successful Consultative Group meeting and a Paris Club
\nrescheduling.<\/p>\n
The new coalition government inherited deep political, social,
\nand economic problems and, during its first year of office, the
\nauthorities have had to deal with an upsurge of sectarian
\nviolence, threats of secession from various provinces, and a
\nseries of political disputes. All of these have affected the
\nimplementation of the economic program.<\/p>\n
Nonetheless, significant progress has been achieved in
\nmacroeconomic stabilization. Preliminary data indicate that real
\ngross domestic product (GDP) has risen by about 4 percent (year-
\non-year) during the first half of 2000. The recovery continues to
\ndepend principally on growth of private consumption, though
\nrising non-oil export volumes have also helped in recent months.
\nGross fixed investment appears to have bottomed out, but with
\nreal GDP still some 10 percent below its pre-crisis level, there
\nhas been minimal new investment from private sources.
\nInflationary pressures have remained relatively subdued-
\nreflecting the large output gap as well as prudent fiscal and
\nmonetary policies. Gross reserves of Bank Indonesia have also
\nbeen substantially replenished over the last two years to some
\n$28 billion.<\/p>\n
Some progress is also being made in the core structural areas,
\nparticularly in bank and corporate debt restructuring, although
\nthere have been delays. The government is making efforts to move
\nmore forcefully in imposing sanctions on recalcitrant debtors,
\nrecapitalizing and restructuring the banking sector, and pushing
\nforward the process of asset recovery and debt restructuring.
\nHowever, uneven program implementation and increasing political
\nuncertainty have made this progress slow and uneven, contributing
\nto the recent deterioration in market sentiment.<\/p>\n
These areas, together with the achievement by Indonesia's
\nbanking system of international prudential standards, remain the
\ncore outstanding tasks for sustaining the recovery.<\/p>\n
The authorities' macroeconomic framework for 2000 entails
\nachieving a real growth rate of 3-4 percent, keeping average
\nannual inflation at 3-4 percent, and a further build-up in
\nforeign exchange reserves. The approved budget deficit of 4.8
\npercent of GDP should help to promote recovery, while ensuring
\nadequate protection for the poor. The room to lower interest
\nrates should return once confidence improves and risk premia
\nbegin to fall. Looking beyond the current year, achievement of 4-
\n5 percent growth and maintaining inflation below 5 percent in
\n2001 are well within each. However, there are many risks in the
\nnear-term, and achievement of these objectives is predicated on
\nswift reduction of political uncertainties and intensified
\nprogram implementation.<\/p>\n
Indonesia's stand-by arrangement (SBA) was approved on Nov. 5,
\n1997, with a total of SDR 3.7 billion being drawn (out of a total
\nof SDR 8.3 billion). The SBA was replaced by an extended
\narrangement on Aug. 25, 1998, under which about SDR 3.8 billion
\nwas drawn (out of an augmented total of SDR 5.4 billion). A new
\nextended arrangement in the amount of SDR 3.6 billion was
\napproved on Feb. 4, 2000 and, thus far, about SDR 0.8 billion
\nhas been drawn. Indonesia's obligations to the Fund now amount to
\nthe equivalent of about $10 billion.<\/p>\n
Executive Board Assessment<\/p>\n
Executive Directors noted that, three years into its economic
\nreform program, and with strong international support, Indonesia
\nhas achieved significant progress in macroeconomic stabilization.
\nThe economy is growing again, inflation is low, gross reserves
\nhave been considerably restored, and the poverty rate is
\ndeclining. Nevertheless, Directors saw many vulnerabilities that
\ngive considerable uncertainty to the medium-term outlook. In
\nparticular, the renewed volatility and weakness in financial
\nmarkets in the year 2000 pose a risk to the recovery. Market
\nconfidence is fragile, and private capital flows have yet to
\nrecover. Moreover, asset recovery and corporate debt
\nrestructuring have not yet reached a decisive stage.<\/p>\n
Directors stressed that, to consolidate the recovery and
\nimprove the medium-term outlook, the authorities should address
\nthese weaknesses rapidly and give strong political leadership to
\nthe economic program. They considered that careful and consistent
\nmanagement of macroeconomic policy is a prerequisite for the
\nreturn of confidence and growth. Equally, they stressed the need
\nfor further banking sector reform, rapid progress in asset
\nresolution, acceleration of corporate debt restructuring, and
\nadherence to good governance, which will be critical to
\ndelivering a sound medium-term outlook. Directors were encouraged
\nby the commitment of the new economic team to take ownership of
\nthe program and intensify its implementation with greater
\nconsistency.<\/p>\n
Directors agreed that a supportive fiscal stance remains
\nappropriate for 2000, but considered that fiscal consolidation
\nshould begin in 2001-in view of the high level of government
\ndebt. In light of the improved outlook for growth, they welcomed
\nthe authorities' intention to use additional oil revenues to help
\nadvance fiscal consolidation. In particular, they cautioned
\nagainst additional public sector pay increases unless these were
\naccompanied by significant civil service reform.<\/p>\n
Directors commended the authorities for the early passage of
\nfive tax laws that are aimed at improving the efficiency of the
\ntax system and enhancing the revenue base.<\/p>\n
Directors observed that fiscal decentralization poses a
\ndifficult challenge. They see considerable risks to fiscal
\nsustainability as well as to the delivery of essential public
\nservices. Directors stressed that reducing the macroeconomic
\nrisks will require a pragmatic and phased approach to fiscal
\ndecentralization, especially given the delays in setting up the
\nnecessary implementing institutions. They cautioned that all
\nborrowing by sub-national governments should be subject to strict
\nlimits, and that a contingency should be built into the 2001
\nbudget.<\/p>\n
Executive Directors welcomed the Indonesian authorities'
\ncontinued commitment to a floating exchange rate and an open
\ncapital account. They stressed the importance of strengthening
\npublic confidence in the currency. Regarding monetary policy,
\nDirectors agreed that as market sentiment improves and risk
\npremia are reduced, there should be some room for real interest
\nrates, which are still high, to decline. This would, however,
\nrequire consistent and forceful implementation of key reforms,
\nparticularly in the areas of bank and corporate debt
\nrestructuring.<\/p>\n
On structural reforms, Directors noted that considerable
\nprogress had finally been made in recapitalizing the state banks,
\nand in restoring the banking system to solvency, albeit at
\nsubstantial cost in terms of the increase in public sector
\nindebtedness. However, the restructuring process remains far from
\ncomplete. They noted with concern that profitability is low, the
\nstate banks have high operating costs and low earnings potential,
\nand the large state banks continue to suffer from illiquidity.
\nThey thus underlined the need for vigilance on the part of the
\nsupervisory agencies, to ensure continued financial and
\noperational restructuring, especially of the state banks, and
\nwith the help of international expertise. The government should
\nalso divest the large shareholding that it acquired in the
\nbanking system during the crisis, while strengthening the
\nsupervisory and governance framework to international standards.<\/p>\n
Directors expressed disappointment at the slow progress in
\nasset recovery and corporate debt restructuring. They welcomed
\nthe authorities' renewed efforts in these areas and their
\ncommitment to accelerate the pace of asset sales and debt
\nrestructuring by the Indonesian Bank Restructuring Agency (IBRA)
\nand the Jakarta Initiative Task Force (JITF). These efforts will
\nbe essential to stimulate new investment and capital inflows and
\nfacilitate a reduction in Indonesia's public debt burden and,
\nthereby, should help to enhance medium-term growth prospects.
\nDirectors noted, however, that strong political leadership is
\nneeded to change the incentive structure faced by recalcitrant
\ndebtors.<\/p>\n
In this regard, Directors welcomed the establishment of the
\nnew IBRA governing board that aims to balance independence with
\naccountability.<\/p>\n
They also welcomed the supporting legal reforms to enhance
\ngovernance in the court system-which will be crucial to the
\nacceleration of corporate debt restructuring and asset
\nresolution-such as the appointment of ad hoc judges from the
\nprivate sector to cases before the Commercial Court, and the
\nestablishment of a Joint Investigating Team to address governance
\nissues with respect to the court system.<\/p>\n
Directors emphasized the importance of progress in fiscal
\ntransparency, including oversight of private foundations,
\nintegration of all off-budget funds, and improvements in treasury
\nmanagement, which should help to anchor the outlook for medium-
\nterm recovery and the achievement of fiscal sustainability. They
\nalso agreed that improving public sector governance and
\nprivatization of state enterprises will help to create a more
\nfavorable climate for increased foreign investment and sustained
\neconomic growth.<\/p>\n
Directors welcomed Indonesia's recent compliance with the SDDS
\nand noted that data provision is adequate for basic macroeconomic
\nsurveillance. They noted, however, that a number of data
\nshortcomings remain, and stressed that priority should be given
\nto improving the statistical base to allow for better monitoring
\nof economic reforms and performance. In particular, fiscal and
\ndebt data are weak, and bank and corporate sector data needs
\nstrengthening for the better monitoring of restructuring.<\/p>\n
Directors welcomed the authorities' commitment to address
\nthese deficiencies.<\/p>\n
Public Information Notices (PINs) are issued, (i) at the
\nrequest of a member country, following the conclusion of the
\nArticle IV consultation for countries seeking to make known the
\nviews of the IMF to the public.<\/p>\n
This action is intended to strengthen IMF surveillance over
\nthe economic policies of member countries by increasing the
\ntransparency of the IMF's assessment of these policies; and (ii)
\nfollowing policy discussions in the Executive Board at the
\ndecision of the Board.<\/p>",
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