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)