RI's macroeconomic situation remains difficult<\/p>\n
The following is the International Monetary Fund's Public
\nInformation Notice (PIN) No. 99\/33 issued on April 13 reviewing
\nthe situation in Indonesia.<\/p>\n
WASHINGTON: On March 25, 1999 , the Executive Board concluded
\nthe 1999 Article IV consultation with Indonesia.<\/p>\n
Background<\/p>\n
Prior to mid-1997, Indonesia had experienced 25 years of
\nsustained economic progress, during which income per capita had
\ntrebled and the number of people in poverty had fallen sharply.
\nHowever, structural weaknesses had intensified over the years,
\nleaving the economy vulnerable when hit by the regional financial
\ncrisis. In particular, the corporate sector had borrowed very
\nheavily abroad, usually without hedging foreign currency
\nexposure; the banking system had been poorly supervised, with
\nwidespread violations of legal lending limits; and microeconomic
\npolicies had been compromised by poor governance.<\/p>\n
Sustained pressure on the rupiah in the wake of the flotation
\nof the Thai baht in July 1997 imposed severe stress on the
\neconomy. In November, the authorities reached agreement with the
\nFund on an economic adjustment program that was supported by a
\nlarge official external financing package.<\/p>\n
Key elements of the program included monetary policy
\ntightening, strengthening of the banking system, and a set of
\nstructural reform measures to enhance efficiency and transparency
\nin the corporate sector.<\/p>\n
However, uneven program implementation and increasing
\npolitical uncertainty in the ensuing months led to intensified
\ncapital outflows and a precipitous decline in the value of the
\nrupiah. The political disturbances in May 1998, which culminated
\nin the resignation of President Soeharto, were accompanied by
\nfurther economic disruption and further sharp depreciation of the
\nrupiah.<\/p>\n
In late-June 1998, the new Indonesian government reached
\nagreement with the Fund on a new stabilization package intended
\nto restore macroeconomic stability, rebuild the distribution
\nsystem, strengthen the social safety net, and address the
\ndeteriorating condition of the financial system.<\/p>\n
Monetary policy focussed on reducing inflation and
\nfacilitating an appreciation of the overly depreciated exchange
\nrate. The fiscal stance was eased to permit greater social
\nexpenditure and help stimulate economic activity. The program
\nachieved important results in terms of restoring macroeconomic
\nstability, although output during the 1998\/99 fiscal year was
\ndown 16 percent on the previous year's level, with the decline in
\ninvestment especially marked, and the inflation rate was about 66
\npercent.<\/p>\n
Real wages fell sharply and surveys indicated that the share
\nof the population below the poverty line rose.<\/p>\n
The authorities' macroeconomic framework for 1999\/2000
\nenvisages that the economy should soon bottom out, that real GDP
\nfor the year would be broadly unchanged, and the external
\nposition should strengthen, with foreign reserves expected to
\nincrease to around $29 billion (five months of imports of goods
\nand services). Prudent monetary policy should lay the basis for
\naverage inflation of some 15-20 percent for the year. The budget
\ndeficit is projected at nearly 6 percent of GDP to help promote
\nrecovery, with increased provisions for targeted social safety
\nnet outlays; the bulk of this deficit will, as in 1998\/99, be
\nfinanced through external borrowing from multilateral and
\nbilateral donors.<\/p>\n
IMF financial support to Indonesia at the beginning of the
\nAsian crisis took the form of a three-year Stand-by Arrangement,
\napproved by the Executive Board in November 1997, in an amount of
\nSDR 7.3 billion. In July 1998, this amount was increased by SDR 1
\nbillion. In August 1998, the Executive Board agreed to convert
\nthe undrawn amount of SDR 4.7 billion into an Extended
\nArrangement, which gave Indonesia more favorable repayment
\nconditions. On March 25, 1999, the Executive Board approved an
\nincrease in the amount to be made available by a further SDR 0.7
\nbillion.<\/p>\n
Total purchases by Indonesia now amount to SDR 6.8 billion
\n(about US$9.3 billion), with a further SDR 2.2 billion (about
\nUS$3 billion) available between now and November 2000.<\/p>\n
Executive Board Assessment<\/p>\n
Executive Directors expressed satisfaction with the continued
\nprogress in implementing the program, while noting that recent
\npolitical and security developments underscored the fragility of
\nthe current situation. Directors welcomed the announcement on
\nMarch 13, 1999, of a major program of private bank
\nrecapitalization and closures, and the agreement reached with the
\nFund staff on strengthening macroeconomic and structural
\npolicies.<\/p>\n
However, recent export performance has been disappointing,
\nthere has been renewed volatility of the rupiah within a more
\ndepreciated range, inflation rose in December through February,
\nand progress in corporate restructuring has been limited. These
\ndevelopments are all a reminder of the considerable risks that
\ncould lie ahead. Moreover, Directors noted that the recent
\nincidents of social unrest and the uncertainties related to the
\nupcoming elections had also affected confidence.<\/p>\n
Directors supported the proposed tightening of the monetary
\nstance, which should help to consolidate the program's
\nstabilization gains. They endorsed the efforts of the authorities
\nin recent days to bring base money down substantially through
\nvigorous open market operations, thereby offsetting the upsurge
\nin liquidity that had occurred prior to the finalization of the
\nbank restructuring package. Directors agreed that monetary policy
\nshould remain cautious in 1999\/2000, and that the monetary stance
\nshould not be eased prematurely-before there were clear signs of
\nimproving confidence and lower inflation. However, concern was
\nexpressed about the inadequate availability of credit to the
\nexport sector.<\/p>\n
Directors were also concerned about the continuing negative
\nspreads between the borrowing and lending rates of banks, which
\nfurther underscored the urgent need for bank restructuring.<\/p>\n
Directors expressed concern that fiscal stimulus had been slow
\nto develop over the past year. This was due principally to delays
\nin finalizing spending programs and improving their execution, as
\nwell as slower than anticipated disbursements of external
\nfinancing. They considered that the size of the 1999\/2000 budget
\ndeficit was appropriate to impart a larger stimulus to the
\neconomy than was achieved in 1998\/99. Directors noted that the
\nbudget is projected to be fully financed without recourse to
\ndomestic bank financing, but cautioned that the budgetary
\nframework needed to retain the flexibility to respond both to
\nevolving circumstances-including the possibility of shortfalls in
\nexternal financing-and the need to maintain long-term
\nsustainability.<\/p>\n
Directors welcomed the planned expansion of well-targeted
\nsocial spending in 1999\/2000. They urged the authorities to
\nensure that spending goals on health, education, and employment
\ngeneration were fully met, consistent with the overall deficit
\ntarget, in order to limit the social impact of the crisis.
\nDirectors noted that this would require timely agreement with
\nmultilateral and bilateral donors on the transparent
\nadministration and monitoring of social safety net programs. On
\nlabor issues, they welcomed Indonesia's adoption of four of the
\nInternational Labor Organization's seven core labor standards,
\nand encouraged it to subscribe to the other three, as well as to
\nimprove compliance with the standards already adopted.<\/p>\n
Directors stressed that the large bank restructuring costs
\npointed to the urgency of intensifying asset recoveries from
\nlarge corporate debtors and reversing the declining budgetary
\nrevenue effort. In this connection, they strongly urged the
\nremoval of the recently granted income tax holidays-for up to
\neight years to newly established corporations in 22 industrial
\nsectors-in accordance with the recommendations of the Fund's
\nFiscal Affairs Department of earlier this month, and called for
\nefforts to strengthen tax and customs administration.<\/p>\n
Directors welcomed the commitments that had been made by
\nJapan, the World Bank, and the Asian Development Bank to fill the
\nexternal financing gap in 1999\/2000. They supported the further
\naugmentation of the Fund-supported program, which they believed
\nhad helped to catalyze these resources, while noting that the
\nrelatively low level of disbursements from other multilateral
\ninstitutions raised serious issues of burden sharing.<\/p>\n
Directors stressed the importance of avoiding delays in the
\ndisbursement of official external financing, especially in the
\nnext few months when private capital inflows are not expected.
\nThey noted that discussions are also ongoing with the London Club
\n(on public debt) and on a second interbank exchange offer on
\nprivate debt. In light of the financing assurances, Directors saw
\nscope for the exchange rate of the rupiah, which is market
\ndetermined, to appreciate significantly if economic and security
\nconditions stabilize.<\/p>\n
Directors stressed that successful bank and corporate
\nrestructuring were crucial to improve governance and sustain
\nmedium-term recovery. However, both were still at an early stage,
\nand Directors urged that the processes be accelerated. They noted
\nthat the private bank recapitalization program will retain an
\nimportant element of private ownership and management in
\nIndonesia's banking system. Directors emphasized the particular
\nimportance of periodic checks of the soundness of the banking
\nsystem, the successful restoration of which also depended
\ncritically upon the restructuring of the state banks and their
\nearly privatization. They stated that state bank recapitalization
\nshould be undertaken only after restructuring was completed, and
\nemphasized that sound and transparent restructuring of the state
\nbanks was critical to the success of the overall Indonesian
\neconomic stabilization and reform program.<\/p>\n
Directors emphasized that the Indonesian Bank Restructuring
\nAgency (IBRA) is central to banking system reform, especially for
\nasset recovery. They stressed that the agency must be fully
\nindependent to provide assurances that the public costs of bank
\nrestructuring are being minimized. Directors underlined the
\nimportance of the Asset Management Unit's developing asset
\nmanagement procedures at an early date, and stressed that it
\nshould remain fully independent and be provided with adequate
\nresources. Strong political leadership and external monitoring
\nwill be required to assure that this process is successful.<\/p>\n
Directors urged the authorities to accelerate corporate debt
\nrestructuring under the Jakarta Initiative and take effective
\nmeasures to counter growing debtor resistance. In this regard,
\nthey stated that the bankruptcy law must be applied as envisaged,
\nin a manner consistent with international practice. Directors
\npressed for early implementation of legislation aimed at
\nimproving governance, including in the judiciary, which has
\nalready been sent to Parliament, and strengthening of the
\nCommercial Court. They said that state banks and IBRA should
\naggressively pursue loan collection from their largest borrowers,
\nand quickly initiate bankruptcy filings against recalcitrant
\ndebtors. Directors expressed disappointment at the delays in
\nprivatization. While recognizing that in part this reflected weak
\nmarket conditions, they urged the authorities to accelerate the
\nprivatization process, including by improving the regulatory and
\nlegislative framework.<\/p>\n
Directors recognized that the authorities were trying to
\nreorient the economic, financial, and government structure to
\nbroaden participation by weaker economic groups and regions. They
\nstrongly supported the authorities' commitments in this regard to
\nrespect existing ownership rights, move cautiously to avoid any
\nloss of macroeconomic control, and consult with international
\ninstitutions before implementing new initiatives. Consolidation
\nof the new competition law and the first phase of fiscal
\ndecentralization would be the task of the successor government,
\nand Directors observed that this would need to be an early and
\nessential part of the Fund's dialogue with that government. In
\nthe meantime, they cautioned that, based on experience in other
\ncountries, devolution of revenue should be commensurate with
\nexpenditure responsibilities, and that a loss of overall
\nmacroeconomic control had to be avoided.<\/p>\n
Directors concluded that the macroeconomic situation in
\nIndonesia would remain difficult until the political transition
\nwas further advanced. Firm implementation of the program and the
\nexpected continued strong financial support of the international
\ncommunity should allow for the restoration of positive real
\ngrowth from late this year. They underscored the importance of
\nensuring transparency in program implementation, especially with
\nregard to corporate and bank restructuring, and the need to avoid
\npolitical interference in these processes. Directors also stated
\nthat policy continuity after the elections and a clear political
\nwill for reform will be crucial to unleash new confidence in the
\nadjustment program and to strengthen the country's medium-term
\ngrowth prospects and its external position. Overall, Directors
\nwere satisfied that policies and developments continue to evolve
\nas best as possible in a manner consistent with setting the stage
\nfor economic recovery, against a background of difficult and
\nunsettled domestic conditions.<\/p>\n
Window A: ...the macroeconomic situation in Indonesia would remain
\ndifficult until the political transition was further advanced.<\/p>\n
Window B: ...the importance of ensuring transparency in program
\nimplementation, especially with regard to corporate and bank
\nrestructuring, and the need to avoid political interference in
\nthese processes.<\/p>",
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