Govt and IMF sign new LoI

JAKARTA (JP): After eight months of delay, the government signed on Monday a Letter of Intent (LoI) with the International Monetary Fund (IMF), giving Indonesia a much needed boost in renewing confidence among the international financial community.

The agreement could pave the way for the IMF to disburse its long-delayed US$400 million loan tranche to Indonesia, and for the Paris Club of creditor nations convening next month to discuss the rescheduling of some of Indonesia's foreign debt.

The new LoI reveals that the IMF is easing some economic reform targets in apparent support for President Megawati Soekarnoputri's request that donor countries provide Indonesia with some "breathing space" in fulfilling its debt obligations.

The inflation rate is now targeted at between 9 percent and 11 percent, extending the range from an earlier target of 9.3 percent.

The IMF has also revised Indonesia's gross domestic product (GDP) growth for this year downward from 4.8 percent, to between 3 percent and 3.5 percent. The base money target has also been raised from Rp 108 trillion to Rp 110.5 trillion, although it is still lower than the current level of Rp 112 trillion.

In the LoI, Indonesia also agreed to raise Rp 27 trillion from the sale of assets under the Indonesian Bank Restructuring Agency (IBRA) and Rp 6.5 trillion from the privatization of state-owned enterprises.

"We are committed to keeping the budget deficit at 3.7 percent of the GDP," Minister of Finance Boediono said after the LoI signing.

Meanwhile, Bank Indonesia Governor Sjahril Sabirin said he would maintain the current high interest rates despite the IMF's relaxation of the base money supply target.

Both Boediono and Sjahril signed the LoI, along with Coordinating Minister for the Economy Dorodjatun Kuntjoro-Jakti.

The signing of the LoI on Monday followed a week of intensive talks between the government and a visiting IMF team, led by its Asia Pacific Deputy Director Anoop Singh.

The last time Indonesia signed an LoI was last September, with a new one supposed to be signed last December.

However, the government's failure to meet several of the previous LoI targets prompted the Fund to freeze its $400 million loan tranche to Indonesia.

Since then, relations between the government and the IMF floundered, only recently achieving renewed strength due in part to the appointment of a new government.

The signed LoI now awaits the approval of the IMF's Board of Executive, which has the final say on the release of the $400 million loan tranche.

In total, the Fund is administering a $5 billion loan package to Indonesia, which is contingent on the country complying with a three-year economic reform program.

"According to normal procedure, the executive board would meet after about two weeks to consider the letter of intent. This meeting has been tentatively scheduled for Sept. 10," IMF's Singh said.

The government hopes to secure the IMF board's approval before the Paris Club of creditor nations convenes next month.

The Club is set to revive a debt rescheduling deal worth $2.8 billion, providing a new LoI has been approved.

Without the Paris Club deal, the government must settle the $2.8 billion in sovereign debt this year.

Also, the new LoI increases Indonesia's chances of receiving more loans from donor countries under the Consultative Group on Indonesia (CGI).

The government has expressed hope of the CGI increasing its loans to Indonesia to help finance a 2002 state budget deficit.

The Group is slated to meet in November, by which time the government must present it with a credible draft of next year's budget.

With a new LoI at hand, the government is also more likely to attract foreign investors into the country.

Previous bickering with the IMF had come at the cost of foreign investors shying away from Indonesia.

The government is relying on foreign investment and loans to help contain this year's state budget deficit at 3.7 percent of gross domestic product (GDP), as stipulated under the LoI.

Without these, it must seek alternative sources of revenue. That could translate into the imposition of higher taxes and an increase of fuel and power prices. (bkm)

Highlights of the new LoI:

- GDP growth set at 3 percent to 3.5 percent, inflation at 9 percent to 11 percent by the end of this year, and base money supply growth at 12.5 percent by March 2002.

- Introduction of treasury bills by year end to gradually replace Bank Indonesia's promissory notes.

- Bank Mandiri privatization through an initial public offering of up to 30 percent by the end of this year.

- IBRA revenue target at Rp 27 trillion, of which Rp 19.8 trillion must be collected in cash by end of September 2001.

- Announcement of performance audits of key state firms, including PT Telkom and PT Garuda Indonesia, by end of September.

- Finalization of the divestment of a 51 percent stake in Bank Central Asia (BCA) and Bank Niaga by end of December.

- Publication of the review of 10 IBRA debt restructuring deals by the Oversight Committee by end of October.

- Target to issue bonds by early September to replenish funds for the government's blanket bank guarantee scheme.

- Restructuring corporate debts totaling $14 billion to $15 billion under the Jakarta Initiative Task Force (JITF) this year.

- Targeting privatization proceeds of Rp 6.5 trillion this year.