Government and IMF sign letter of intent

Government and IMF sign letter of intent

JAKARTA (JP): The government finally signed on Wednesday a new
letter of intent (LoI) with the International Monetary Fund to
pave the way for the release of a US$400 million loan early next
month.

The agreement was signed by the Coordinating Minister for the
Economy, Finance and Industry Kwik Kian Gie, finance minister
Bambang Sudibyo and Bank Indonesia Governor Sjahril Sabirin.

Kwik said at a news conference that the fund was expected to
disburse some US$400 million in new loans to the country early
next month after its executive board approved the letter.

"Agreement on the LoI is a sign of the government's progress
in implementing its economic reform program ... This program is
aimed squarely at bringing Indonesia back to a path of rapid
economic growth," Kwik said.

The news conference was supposed to be held at the
presidential office, but was moved to Kwik's office following a
boycott by journalists assigned to cover events at the
presidential office.

The IMF promised President Abdurrahman Wahid's administration
in January that it would provide a total of $5 billion in loans
to help finance the country's three-year economic reform program.

The IMF was supposed to disburse $400 million last month, but
it was delayed due to the country's slow progress in implementing
the reform program agreed in January.

The IMF and the government completed the first review of the
reform program earlier this month.

Sjahril said the signing of the new letter should a provide
positive impact on the ailing rupiah because it showed the
government was committed to implementing the reform program.

"This should provide a positive impact on the rupiah," he
said.

The rupiah closed 1.7 percent higher on Wednesday at Rp 8,395
per U.S. dollar compared to Rp 8,535 on Tuesday.

The rupiah has been under pressure over the past couple of
weeks due to a combination of external factors, combined with
domestic political and economic uncertainty.

The new agreement basically contains additional economic
measures, particularly in the fiscal, bank reform and corporate
restructuring areas, to support the reform program set out in the
January Memorandum of Economic and Financial Policies (MEFP).

The government said that economic growth this year was
expected to be at the top end of the targeted 3 percent to 4
percent range, while end-period inflation should be well within
the targeted 5 percent to 6 percent range.

On the fuel subsidy policy, the government said that fuel
prices would be raised by an average of 12 percent, but their
full implementation was delayed in order to better prepare the
public for the increase, as well as to finalize measures to
protect the poor.

"We are working toward a mechanism involving a lump-sum cash
transfer to targeted households, and using the safeguards
established for the social safety net program, in consultation
with the World Bank," the government said in the supplementary
MEFP.

The government was set to raise fuel prices starting last
month, but the measure was delayed due to public protests and
concern over possible abuse of the fuel subsidy mechanism for the
poor.

The government did not specify when the fuel price increase
would be implemented, but said the mechanism to protect poor
families against the fuel price increase was expected to be
completed by the end of June.

The IMF has strongly insisted the government drastically
reduce fuel subsidies to lessen the burden on the state budget.

On the fiscal reform agenda, the government expected the House
of Representatives would approve a new tax law by July.

The government also said that it was committed to delivering
the increased fiscal transparency, including a performance audit
of the tax office by the Development Finance Comptroller (BPKP),
which would start in June and was expected to be completed by the
end of November.

The government said it intensified preparation for
implementing fiscal decentralization in 2001.

"A firm timetable for implementation of fiscal
decentralization will be prepared by the time of the next review
(of the economic reform program), in consultation with the
forthcoming IMF/World Bank technical assistance mission," the
government said.

The IMF and the government were scheduled to meet again in
July to review progress of the reform program.

In the bank restructuring area, the government said the
Indonesian Bank Restructuring Agency (IBRA) would reach several
major debt restructuring agreements, particularly with the top 21
obligors who account for about 36 percent of IBRA's total loans
(about $12.4 billion).

An obligor is a cluster of debtors controlled by a single
business group.

"IBRA's strategic objective is to reach the stage of
finalizing restructuring term sheets, or initiating legal actions
against uncooperative debtors, for at least 35 percent of the
nominal loan value of these obligors by June, and for all the 21
obligors by end 2000," the government said.

IBRA has received more than Rp 200 trillion worth of
nonperforming loans from domestic banks as part of the country's
bank restructuring program.

The agency has been criticized for its slow progress in
restructuring or recovering the bad loans.

The government also said IBRA and Bank Indonesia would publish
before the end of June their audited accounts so that the public
would have a clear view of the financial positions of the two
critical institutions.

The government added that a new governance framework would be
established for IBRA.

"This will include an independent governing body, in order to
ensure that the agency is professional, free from political
interests and transparent in its operations," the government
said.

With IBRA's huge array of assets worth more than Rp 600
trillion, there are fears the agency would be prone to
manipulation by groups with vested interests. (rei/udi)