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)