Indonesia, IMF strike new deal<\/p>\n
JAKARTA (JP): Indonesia and the International Monetary Fund
\n(IMF) reached an agreement yesterday on a new set of economic
\nreform measures, which for the first time specifically addresses
\nthe problem of the country's huge corporate debt owed to foreign
\nbanks.<\/p>\n
Under the deal with the IMF, Indonesia promised to carry out
\nits reform commitments to the letter, a pledge widely deemed as
\nnecessary not only to revive the economy, but more importantly,
\nto regain public confidence at home and abroad.<\/p>\n
But there was some bad news in the package as spelled out by
\nCoordinating Minister for Economy, Finance and Industry Ginandjar
\nKartasasmita at a media briefing held after a cabinet meeting at
\nthe Bina Graha presidential office yesterday.<\/p>\n
Interest rates will be kept high until the rupiah recovers to
\na more acceptable level, and the economy, originally predicted to
\nhave zero growth, will be projected to contract 4 percent this
\nyear.<\/p>\n
The government is revising its budget forecasts. It is now
\npredicting inflation to run at 17 percent this year instead of
\nthe original 20 percent projection. The budget will also project
\ninternational prices of oil, which contributes a sizable portion
\nto government revenue, to average US$14.50 a barrel instead of
\n$17 per barrel.<\/p>\n
The government's fiscal 1998\/1999 budget, which began April 1,
\nwill run a deficit of 3.2 percent, he said. This will be covered
\nby foreign loans and by part of the proceeds from the
\nprivatization of 12 state companies this year, he added.<\/p>\n
Ginandjar said the IMF had agreed to allow the government to
\ncontinue subsidizing rice and soybeans for an indefinite period.<\/p>\n
Subsidies on other foodstuffs, drug raw materials, animal feed
\nand energy will remain with the condition that they be phased out
\nand ended by October. Fuel subsidies, however, will be exempted
\nfrom the deadline, he said.<\/p>\n
Ginandjar acknowledged that there would be more price
\nincreases in the coming months, including for gasoline, which
\nwould eventually force up public transportation fares.<\/p>\n
"Restoring the economic situation is not a simple and easy
\ntask... In the coming days, despite the new agreement with the
\nIMF, we need to continue to tighten our belt."<\/p>\n
Recovery, as reflected in the rupiah's exchange rate, interest
\nrates or inflation, will not occur instantly, he said. "The most
\nimportant thing is that we are heading in the direction toward an
\neconomic improvement and recovery."<\/p>\n
Yesterday's announcement came after three weeks of intensive
\nnegotiations with the IMF. The deal was reached in the morning
\nand presented before a cabinet meeting later in the day.<\/p>\n
President Soeharto fully agreed to it, Ginandjar said.<\/p>\n
The government had originally expected to make the details of
\nthe agreement public yesterday, but postponed the announcement
\nuntil today to allow for the text to be translated and to give
\nthe IMF board in Washington a first view, Ginandjar said.<\/p>\n
The IMF has organized a $43 billion rescue package for
\nIndonesia, but it is insisting on tough economic reforms.<\/p>\n
Debt settlement<\/p>\n
Ginandjar said a framework for a debt settlement had been
\nworked out, using a model used by Mexico in resolving a similar
\nproblem in 1993.<\/p>\n
Government participation in the debt settlement will be
\nlimited, he said. "There's not going to be a government bailout
\nor a government subsidy."<\/p>\n
The government will guarantee debtors access to foreign
\ncurrencies to repay their debts at a "reasonable" exchange rate.<\/p>\n
The currency crisis was precipitated by debtors rushing to buy
\nforeign currencies late last year as concerns mounted about the
\nfalling rupiah's value.<\/p>\n
The debt solution required creditor banks to give a grace
\nperiod to debtors in repaying debt principals, and a longer
\nrepayment period, Ginandjar said. "This is not a debt moratorium.
\nIt's known as a standstill," he said.<\/p>\n
Creditors would still have to assume the risks of the loans.
\n"The creditors and the government are meeting halfway," he said.<\/p>\n
Ginandjar said this proposed framework was voluntary in nature
\nbut that debtors and creditors who opted out of it would not be
\nentitled to the facility offered by the government.<\/p>\n
He said the government was looking at a three year to four
\nyear time frame for the debts to be settled but that the
\nframework still had to be negotiated between debtors and
\ncreditors.<\/p>\n
If the debts cannot be solved, then they will have be resolved
\nby law, and for this, the government is drawing up a regulation
\nto amend the Dutch-enacted bankruptcy law which has been deemed
\nineffective to deal with the economic crisis.<\/p>\n
While a tight monetary policy will keep interest rates high,
\nthe government will offer credits at subsidized rates to small
\nand medium companies and cooperatives, Ginandjar said, adding
\nthat the World Bank and the Asian Development Bank would
\nparticipate in the scheme.<\/p>\n
The government plans to expand its labor-intensive projects
\ndesigned to provide jobs for the growing ranks of unemployed
\nrural and urban workers, he said.<\/p>\n
The government will also accelerate its plan to privatize 12
\nstate companies, chiefly through placement of shares in the stock
\nexchange. Five companies are already listed at the Jakarta Stock
\nExchange and seven more will be listed this year, he said.<\/p>\n
At the cabinet meeting yesterday, President Soeharto ordered
\nMinister of Home Affairs R. Hartono to eliminate all business
\nlevies charged by local administrations at provincial and city
\nlevels. "The minister was asked to not let this ever happen
\nagain," Ginandjar said quoting the President.<\/p>\n
Local government revenues will be bolstered by a new 5 percent
\ngasoline tax, higher tax rates on property sales and the fact
\nthat all property tax revenues will be allocated entirely to
\nlocal governments, he said.<\/p>\n
Bank Indonesia Governor Sjahril Sabirin said the government
\nwould continue to use the free floating exchange rate system for
\nthe rupiah, although it was currently studying various
\nalternative systems.<\/p>\n
"We hope that through the current system and with the support
\nof the IMF, we can restore public confidence and the rupiah will
\ngradually strengthen," Sjahril said.<\/p>\n
One system not discussed in the negotiations was the currency
\nboard system (CBS), which would peg the rupiah to a foreign
\ncurrency at a fixed exchange rate. The government had looked into
\nthe concept over the last two months, a move that sparked
\ncontroversy with the IMF.<\/p>\n
"A CBS is not in the picture. It's on the back burner,"
\nGinandjar said in reply to a reporter's question.<\/p>\n
This is the third agreement that Indonesia has signed with the
\nIMF since October. The first two failed to resuscitate the
\neconomy, with the rupiah continuing its free fall, from Rp 2,450
\nto the dollar in July, to Rp 17,000 in January. Yesterday, the
\nrupiah was trading between Rp 8,000 and Rp 9,000.<\/p>\n
The first agreement suffered when Indonesia wavered on its
\nreform plans, while the second started badly after its
\nannouncement in January for failing to address the corporate debt
\nproblem.<\/p>\n
The January letter of intent was signed by Soeharto himself.<\/p>\n
Ginandjar said he had been assigned to sign the latest
\nagreement, expected for later yesterday.<\/p>\n
Ginandjar denied that the agreement was a correction to the
\nprevious two signed with the IMF. "This is not a deviation. This
\nis a supplement to the basic strategy signed by the President in
\nJanuary."<\/p>\n
"If there's any significant difference, it is that the
\nagreement this time will hopefully eliminate all doubts (about
\nthe government's commitment to reforms)," he said.<\/p>\n
"This time, there is a very strong commitment and also an
\ninstruction from the President himself in the cabinet meeting
\nthat all agreements and commitments should be honored and should
\nbe implemented to the letter." (prb\/emb)<\/p>",
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