Full text of IMF statement on Indonesia

Full text of IMF statement on Indonesia

JAKARTA (JP): The following is the full text of the statement
yesterday by International Monetary Fund (IMF) Managing Director
Michel Camdessus on the IMF fresh reform program with Indonesia:

As you know, an IMF staff team together with Mr Fischer and
myself, have over the last few days been discussing with
Indonesian authorities an acceleration and deepening of much
needed reforms agreed under the IMF supported program.

This is why I am pleased today to announce that the government
of Indonesia and the International Monetary Fund have reached
agreement on a much strengthened and reinforced economic program.

Many of the measures in this program are new, others have been
there from the beginning but are now being accelerated, but all
have one common purpose: they aim to restore confidence in the
currency and in the economy, by demonstrating that the 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.

First, the broad macroeconomic framework. 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 the
single digit level next year, despite the sharp depreciation of
the rupiah.

At the same time, the external current account balance is
expected to move from a deficit into a sizable surplus, thereby
generating additional foreign exchange to help the country to
repay its external debt.

Second, 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.

Based on the IMF presentation, 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 activity.

Nevertheless, to achieve this objective, serious measures will
still be required. In particular, action will need to be taken to
curb energy subsidies, which have grown to unsustainable
proportions as the rupiah's depreciation has pushed domestic
prices far below world levels.

Accordingly, the government will phase out subsidies gradually
by raising both fuel and electricity prices in steps, except for
those on kerosene and certain diesel fuels, where increases will
be kept to a minimum, so as to protect the poor.

Third, fiscal transparency. In order to ensure that the public
is kept fully informed of all government activities, the accounts
of the Reforestation and Investment Funds will be brought onto
the budget in 1998/1999.

Fourth, public sector projects. Under current economic
conditions, public spending must be limited only to those items
that are of vital importance to the country. For this reason, the
program envisages that development spending will be curtailed,
including by canceling immediately the 12 infrastructure projects
that were recently postponed or placed under review.

Moreover, 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.

Fifth, monetary policy. Monetary policy will need to be kept
firm for a sustained period, until confidence in the currency is
restored.

To signal the government's commitment to this stance, Bank
Indonesia will be given full autonomy to conduct monetary policy
and start 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, while
capital that has moved overseas should return to the country,
providing the banks with sufficient liquidity to resume their
lending activity.

Sixth, bank and corporate sector restructuring. It has become
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, which will be announced over the coming days.

Seventh, 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 instance:

From Feb. 1, Bulog's monopoly will be limited solely to rice.
This means its existing monopoly over the import and distribution
of sugar as well as its monopoly over the distribution of wheat
flour will be eliminated.

To complement this action, domestic trade in all agricultural
products will be fully deregulated, so traders will have the
freedom to sell their goods wherever they want and to whom they
want. The Clove Marketing Board will be eliminated by June 1998.

As of Feb. 1, all restrictive marketing arrangements will be
abolished, leaving firms free to produce and export their
products as they wish, and as the market decides. Specifically,
the cement, paper, and plywood cartels will be dissolved.

Another pressing need in the current circumstances is to
encourage foreign investment. Accordingly, for instance, by Feb.
1 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, drought. The program envisages
that community-based work programs will soon be introduced to
sustain the purchasing power of the poor.

In addition, to ensure that adequate food supplies are
available at more reasonable prices, effective Feb. 1, tariffs on
all food items will be cut to a maximum rate of just 5 percent,
while tariff rates on non-food agricultural products will be
reduced by 5 percentage points.

Last but not least, particular attention is being paid to the
proper financing of small and mid-size enterprises and exporters.
To make funds available for this purpose through the banking
system, the Asian Development Bank is putting in place a
program whose details will be announced shortly.

As you can see, this program has a very strong structural
component, in the financial sector as well as in the corporate
sector. The intensive involvement of our friends from the World
Bank and the Asian Development Bank is therefore crucial for
successful implementation.

I am pleased that the staffs of our international
organizations are cooperating effectively, and I am also happy to
tell you that Mr. Wolfensohn, the President of the World Bank,
will visit Indonesia shortly.

As President Soeharto wishes to take personal responsibility
for the quick and full implementation of the program, he has
decided that the people of Indonesia must be fully informed of
its content through the immediate publication of the Letter of
Intent, which he has decided to sign personally.

Moreover, he has decided that in order to ensure that the
economic objectives are realized, he will appoint a high council
of economic ministers -- reporting directly to him -- to oversee
the implementation of the program.

In expressing my confidence in the success of this program, my
thoughts go to those who may experience hardships -- hopefully
for only a short period of time -- because of the very strength
and rapidity of the adjustment process. The program provides for
strengthened measures targeted to alleviating the plight of the
most vulnerable people in the country.

I would like the government of Indonesia to know that the
management of the IMF is open to consider very favorably any
adjustments of budgetary allocations in this domain, provided
these are financed by a corresponding reduction of other
budgetary expenditures of lesser priority, military or otherwise.

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.

I am confident that, if this program is implemented with the
determination and commitment that I myself have seen over, the
past two days, Indonesia should be able soon to begin to overcome
its economic crisis.