Government, IMF to sign new LoI at the end of this month

Government, IMF to sign new LoI at the end of this month

JAKARTA (JP): The government expects to sign a new Letter of
Intent (LoI) on reform measures with the International Monetary
Fund (IMF) at the end of this month, according to Dipo Alam, who
leads the government team in the current review of the country's
economic reform program with the Fund.

Dipo said on Tuesday that the IMF executive board in
Washington was expected to make a decision on the new LoI
sometime in the middle of May.

Dipo was speaking to reporters following a meeting with IMF
Asia Pacific deputy director Anoop Singh, who leads the Fund's
review team.

If the board approves the LoI, which basically contains
various economic targets and an economic reform agenda, the IMF
will disburse the third US$400 million loan tranche to the
country.

The government has been engaged in talks with the IMF review
mission over the past week. The review is expected to be
completed next week.

The IMF delayed late last year the disbursement of the $400
million loan tranche, part of the total $5 billion loan promised
by the Fund in early 2000 to help finance a three year economic
reform program. This was due to signs that the government was
wavering in the implementation of key reform programs.

The IMF was also concerned about the poorly designed fiscal
decentralization policy and government plans to amend the central
bank law.

But after the government managed to resolve the above
differences with the IMF, the Fund sent its mission to Jakarta
last week.

The delay in the disbursement of the IMF loan contributed to
the fall in the exchange rate of the rupiah against the U.S.
dollar, which dropped to a 30-month low of Rp 11,500 per dollar
last month.

The financial market was concerned that the delay in the IMF
money would also prompt other lenders, including the World Bank
and Asian Development Bank, to cut their lending to the country.
The Paris Club of creditor nations had even threatened to cancel
the restructuring of some $2.8 billion sovereign debt maturing
this year, which would have put severe pressure on the already
strained state budget.

Government officials have said that one of the main agenda
items in the current talks with the IMF was plans to revise the
2001 state budget due to the weakening of the rupiah, rising
interest rates, and the prospect of a greater than expected
budget deficit.

Under the current budget, the assumed rupiah exchange rate is
Rp 7,800 per dollar and the interest rate of one month Bank
Indonesia SBI promissory notes is 11.5 percent.

But the exchange rate of the rupiah has always been below the
budget assumption since January. The local currency ended at Rp
10,865 per dollar on Tuesday, down from Rp 10,825 on Monday.

The drop in the value of the rupiah has prompted Bank
Indonesia to allow the SBI interest rate to jump to 15.82
percent.

Coordinating Minister for the Economy Rizal Ramli stated
recently that the budget deficit this year could exceed 5 percent
of gross domestic product (GDP), from the initial projection of
3.7 percent of GDP, if appropriate measures were not taken
immediately.

Finance Minister Prijadi Praptosuhardjo has said that the
government would try to cut down spending and maximize domestic
revenue from taxes to help avoid a fiscal crisis.

A source said earlier that the IMF had asked the government to
cancel several large projects this year to rescue the state
budget, and this was confirmed on Tuesday by Anggito Abimanyu, a
senior official at the finance ministry.

Meanwhile, director general of fiscal decentralization Machfud
Sidik said on Tuesday that the government was planning to ask
resource-rich provinces to assist central government with its
budget problems.

Machfud said that there were several options to be discussed
later with the IMF.

He said that under the plan, the administration of resource-
rich provinces that have a budget surplus would be asked to
provide financing for local development programs originally
planned to be financed by the state budget.

"The central government will become indebted to the regional
governments ... This will then help reduce the burden of the
state budget," he said.

"It is too premature to disclose the options right now," he
added. (rei)